🔔 Ask Anna – How do I make sure I am paying the right amount of tax on my savings interest?

Savers Question 

I have earned in excess of £1000 in interest on savings this past tax year (16/17) which does not include ISAs. I am a standard rate tax payer. I had contacted the HMRC a few months back because I wanted to pay the tax in a lump sum and not have it collected via my tax code.

The advisor told me that since 14/15 tax year they are not notified by any financial institution of how much interest is paid and they have no idea how much I had or how much I owe.

I was amazed at this. How many people will not declare the tax? The government will be losing a fortune in tax receipts.

Thanks

Anna’s reply

All savings providers are still obliged to inform HM Revenue & Customs (HMRC) about any interest that has been earned in the preceding tax year – the difference now is that, because interest on savings accounts has been paid gross since the introduction of the Personal Savings Allowance (PSA) on 6^th April 2016, the amount declared to HMRC will be gross instead of net of 20% tax.

Previously, as savings interest earned would have been paid net of basic rate tax, if you were a basic rate taxpayer, you should not have had any additional tax to pay.

Further to the introduction of the PSA, according to the Government the majority of savers will not need to pay any tax on their savings interest, as the amount they receive will be less than the PSA.

And of those that do earn more than the PSA, many will pay the tax due via the Pay As You Earn (PAYE) scheme, so HMRC should receive all the tax that they are owed.

From 6^th April 2016, if you are part of the PAYE system, you should have been paying tax on a monthly basis via PAYE, so you should check your tax code for the 2016/17 tax year, to see if HMRC has included savings interest and if this is in line with the amount you actually earned. 

If an underpayment of tax arises, this can be collected by a further adjustment to a later year’s tax code or in some circumstances by a lump sum payment. 

Ultimately it is the responsibility of the taxpayer to ensure that they are paying what they should, regardless of whether this is via PAYE or self-assessment – if they fail to do so, they are in danger of facing a penalty plus interest for late paid tax or worse!

It is therefore in everybody’s interest to carefully check their tax code each year to make sure that HMRC is estimating the right amount of savings interest that is expected to be earned. If not, they should inform HMRC and their tax code will be adjusted.

Of course, circumstances will often change throughout the year, which would have an impact on this expected interest for example if a large amount of the money on deposit is spent, added to or if the interest rate earned changes. If this is the case, savers should contact HMRC to update them.

If you need any more information please call us on 0800 321 3581, we are always happy to help.

We really enjoy receiving your questions, so if you have any savings-related queries you would like us to answer, please do get in touch and email [email protected]