Will tax code reduced from "code out" from previous FY saving interest reduced 40% tax threshold?

polarization

I have tried to check online but could not get an idea on how it works. Hope it is the right place to ask.

I am only on PAYE. FY26/27 tax code has been recently reduced after HMRC try to collect the untaxed interest from FY25/26. The total taxable income including the saving interest in FY25/26 were under £50,270 (20% tax).

Just wonder, my tax code is now reduced to 1057L (=£2000 reduction), does it mean that I will start paying 40% tax from the total taxable income of £48,270? Or I only start paying 40% from above £50,270?

Thanks for any comments. It is very confusing as it is the first time need to pay tax on saving interest. 😊

masonic

This would just reduce your personal allowance (so less at 0%, more at basic rate). It wouldn't interfere with the higher rate tax threshold.

Woodstok2000

Instead of getting £12570 at 0%, you get £10570 and so you pay 20% tax on an extra £2000 (£400 per year) but it doesn't change any other thresholds

molerat

You will start having PAYE higher rate tax deducted at £37700 above your coded allowance but that does not mean you are paying that rate of tax, any coding adjustment will take account of your income and be set so the correct amount of tax is deducted - if the coding adjustment is the reason for you moving in to the next band they will reduce the coding deduction so that only half the part that falls into higher rate is coded out.

As an example you are a basic rate tax payer earning £400 below the higher rate threshold. You owe £100 in tax which would be a £500 deduction in your code. That £500 would push you £100 into higher rate PAYE tax so they will reduce the deduction to £450 so the tax deducted would be £400 at 20% and £50 at 40%, £80 + £20 = £100. Having higher rate tax deducted by PAYE does not make you a higher rate tax payer, that is based purely on your income.

masonic

https://forums.moneysavingexpert.com/discussion/comment/82135502#Comment_82135502

It's similar to how a one-off bonus can temporarily trigger "40% tax" because of how payroll software applies the rules. It doesn't mean this tax is actually owed.

HMRC may well let the code run its course for the full year (given they won't be able to predict the final position accurately) and refund any over-collected tax after year-end via a P800 calculation.

It would be worth the OP checking the assumed income figure in the coding notice to understand if any adjustment has already been made for anything predicted to be withheld at 40%, but any discrepancy will wash out at reconciliation.