Pay underpaid tax now or leave it?

eskbanker

maman said:

Yes @eskbanker. What I mean is they have adjusted the tax code for a similar sum of interest this year which I won't be having. I'd assumed they'd not change my tax code but let me pay a lump sum again when this year's interest was known. 🤔

No, once they realise you're earning interest above your allowance, in subsequent years they'll try to collect it during the tax year via PAYE rather than letting it build up to a liability that would only be settled in arrears after the end of the year.  If their estimate is way off for a known reason, you can advise them of that and get the code adjusted though.

sansovino

eskbanker said:

No, once they realise you're earning interest above your allowance, in subsequent years they'll try to collect it during the tax year via PAYE rather than letting it build up to a liability that would only be settled in arrears after the end of the year. 

Absolutely! HMRC would much rather owe you money that let you owe them.

Albermarle

maman said:

Apologies for hijacking your thread but I'm in a similar position. I paid the extra tax due on savings interest immediately as a lump sum but HMRC changed my tax code anyway. ☹️

I assume it'll work out over time but they are basing it on the projection that I'll have the same interest this year. I know I won't because a large chunk of the savings was earmarked/spent on building work.

So, in my case, trying to pay it off didn't help much. 

 but they are basing it on the projection that I'll have the same interest this year.

This is how HMRC work for all kinds of income. If there is no info to the contrary, they assume this year will be the same as last year. They can not really work any other way.

It is possible via your Personal Tax account to update income estimates, but for savings interest it seems not that straightforward. Others may advise. 

Albermarle

sansovino said:

eskbanker said:

No, once they realise you're earning interest above your allowance, in subsequent years they'll try to collect it during the tax year via PAYE rather than letting it build up to a liability that would only be settled in arrears after the end of the year. 

Absolutely! HMRC would much rather owe you money that let you owe them.

To be fair to HMRC, if they let some people build up a big liability, then they could get blamed for not taking the right amount of tax in the first place and landing people with an unexpected bill.
Your tax code is an attempt by HMRC for you to pay the correct amount of tax, based on what info they have.

maman

Thanks for all your explanations. I do realise it's probably the only way that HMRC can operate. It's just that having been on PAYE for so long, I hadn't thought out what would happen when the tax on savings was introduced. 

I'm not complaining. As the old saying about increased taxes goes 'You've got to earn it to pay it'. 

Angelica123

sansovino said:

eskbanker said:

sansovino said:

The whole thing started after interest rates went up about 3 or 4 years ago, and my fairly modest savings started to earn interest over the allowance level. Each year HMRC understimated interest. 

Presumably the savings aren't that modest if underpaid tax on the interest is £650?  Just to check, are you making the most use of tax shelters such as ISAs and SIPPs, albeit you'd still need to verify that tax-free returns there would exceed taxed interest from unsheltered accounts?

Compared to some people I know, a bit over £140K is not an awful lot to last me till I croak. I'm 73; my dad was 93 when he went. The calculation includes tax I owe HMRC for an earlier year. The figures are Estimated Untaxed Interest: £4668.00, actual Untaxed Interest: £5174.00. I moved 40K into a 4% ISA in March and April 2025 and plan to add 20K in April 2025 after the 5th. 

You could still contribute to a SIPP up until you are 75. You would get tax relief on whatever you contributed. You can have a SIPP as well as your civil service pension. 

sansovino

Angelica123 said:

You could still contribute to a SIPP up until you are 75. You would get tax relief on whatever you contributed. You can have a SIPP as well as your civil service pension. 

A SIPP might suit someone whose money is their hobby (or vice versa?) but I am put off by 1. Too much complexity and choice, 2. Charges, 3. Ongoing management needed, and 4. No guaranteed income. Also it would have to be ethical (no supporting things like genocide, global warming, animal cruelty, etc).