Taxable Interest

[OddityOddityOdd]

The hike in interest rates means that I'm liable for interest on savings for the first time as it exceeds my £1K allowance. I'm a pensioner and pay tax via my work pension on a PAYE basis. Does anyone know whether I will be taxed automatically or whether I need to fill out a tax form? The savings are in NSI bonds & high street bank ISAs. Do these providers notify HMRC directly or do I need to contact them ? I don't want to get in a mess with tax but I'm struggling to find info on this.

Are you earning over 1k on your non ISAs?

Are you sure you've sone your sums right and only included taxable interest ?

From this gov.uk weboage
Tax on savings interest: How much tax you pay - GOV.UK.

'Savings in tax-free accounts like Individual Savings Accounts (ISAs) and some National Savings and Investments accounts do not count towards your allowance'.

I go over the allowance and the tax is deducted from my work pension. I get a letter from pension company telling me when the tax owed is over £10. You shouldn’t have to do anything, ISA’s are tax free, so no tax to pay there.

As you only need around £25k on deposit in a non ISA to hit over £1k in interest that doesn’t seem unreasonable does it? I know I keep a float of 6 months expenditure in cash outside my ISA and GIA account just in case I need or fancy something. No point using up an ISA allowance for cash deposits if you max it out on equities each year to shelter both the interest and capital gains.

You don't pay tax on Premium Bonds or ISAs, only on ordinary bank and building society savings accounts (these include ordinary fixed-rate bond type of accounts too). The banks and building societies report it automatically to HMRC and if the total savings interest is over £1000 (if you're a basic rate tax payer) they'll send you a calculation and tell you how they will want to claim the tax off you. If you work and it's not more than £3k ish I think they may try to claim it back through PAYE spread over the whole year, although if you no longer have a salaried job I'm not sure what happens with that - your income obviously has to be big enough to do this).

What kind of account are you getting interest on?

In terms of non-ISA and non-premium bond savings income, the banks and building socs inform HMRC who automatically send you an Underpayment calculation if you owe any tax. This underpayment is often collected via your tax code with your occupational pension, so you need do nothing.

Check your Personal Tax Account.

You don’t need to complete a tax return unless the interest is £10k or more.

But if the pension uses up the pa you need to ensure interest (if over 1k and non ISA) is taxed at source. You should get an annual statement. Rates have just come down again.

just as an aside, I remember years ago (20 years ish?) tax was already paid before you received the interest from the banks and building societies. You could claim it back but for us, and most people, at the time it was never worth the hassle as it was only a couple of quid a year. You had to have really a LOT in savings for it to be worth pursuing claiming the tax back.

Then they changed it so that normal savings interest was paid without tax. That was was fine for many years when interest rates were so low as most ordinary people never earned too much in interest so the thresholds for tax didn't affect them. But for the past few years we've had the double whammy of the savings interest tax-free threshold not incresing, PLUS interest rates going up quite a lot. Loads of ordinary people are for the first time being dragged into having to think about paying tax on their interest. I wonder how HMRC are coping.

It looks like interest rates are going to continue coming down now though so perhaps in a couple of years there won't be as many ordinary people having to worry about this. They'll just have to worry about inflation eroding their hard-earned savings instead! 😆

Thanks folks for your replies. The bulk of savings is in NS&I bonds which are taxable unlike premium bonds. Last year they were paying 6.25% interest but unfortunately the rate is much lower this week. I had a statement from NSI saying the interest was taxable as it exceeded the allowance but it didn't say anything about how to pay it. It's definitely not over £10k interest so it sounds like it will all happen automatically. That's reassuring, thanks for your help everyone.

Just one more question - if you exceed the £1k allowance, does the interest on the ISAs become taxable as well? I assumed it all got rolled up together & tax paid on full amount. Are ISAs regarded as tax free because they never generate enough interest or are they genuinely tax free regardless ?

Isas are non taxable. You could ring hmrc and they may adjust the tax code applied to your pension.

In my experience HMRC will raise a P800 Assessment and tell you how much you need to pay.

But, they often seem to get my calculation wrong and I end up having to submit a Self Assessment Tax Return.

I would suggest waiting for your P800 to arrive, check it carefully and if it is wrong either try to contact them (which will require hours hanging on the phone) or register for Self Assessment and submit a Tax Return.

https://www.gov.uk/tax-overpayments-and-underpayments

Just to add, if you are not already registered on Goverment Gateway it may be worth doing that.

It gives you access to your Tax records, allows you to see and pay your P800 assessment and check you are being taxed correctly.

ISAs are genuinely tax free. I drip my savings into ISAs but I also make sure I get good rates of interest.

It doesn’t seem unreasonable but it sounds as if OP is including the interest they are earning on their ISAs which are always non taxable. If the majority is earned from an ISA there is nothing to worry about

Thanks to all of you, that's great. I'll sit tight until next April and see what happens. I'll try the Gateway, I did use it years ago when I got my pension but haven't needed it or HMRC since then. I can't face trying to phone them and I think the help I've had here has sorted me out. Cheers All. 😀

You do not have to fill out any forms or make any claims. The tax will be payable through PAYE. Each year Financial institutions complete paperwork for the Inland Revenue. This is taken into account when calculating your tax code. The tax is paid a year in arrears to allow the calculation. You don’t pay tax on ISAs

DH has just had a tax assessment notice from HMRC. He earned over £500 in interest (was 40% tax payer so lower limit). HMRC have been advised by 2 separate sources (bank and building society) of his credit interest and they will be adjusting his tax code accordingly to take effect from April 25. His ISA interest is not included in the calculation.

My interest earned also exceeds the £1000 limit but as I don't earn anywhere near the personal tax allowance I'm not being taxed any extra.

What do you mean genuinely? The point of saving in an ISA is exactly the tax free status of the interest/gains. Obviously you need to make sure that it's still the best rate you can get taking any tax into account

@DreamW3aver
I was responding to the ops question. “Just one more question - if you exceed the £1k allowance, does the interest on the ISAs become taxable as well? I assumed it all got rolled up together & tax paid on full amount. Are ISAs regarded as tax free because they never generate enough interest or are they genuinely tax free regardless ?

That is why I said ISAs are genuinely tax free. No idea why you had a problem me using the OPs language.

I also said “I make sure I get the best interest rates”. When you are potentially paying 20% or 40% tax on Interest you need to look beyond the headline rate.

I take it your total pension income is at least £17,500 this year?

Any interest on money in an ISA is tax free regardless of how much. Some people have built up over a 1million GBP in an ISA (often through luck as they picked a particularly succcessful stock for example) and still any interest/dividends/capital gains generated within the ISA is 100 percent tax free.

All money within an ISA including all the interest is tax free forever

This includes stocks & shares ISAs

This includes cash ISAs

Secondly, all winnings on Premium Bonds are tax free forever

Suggest read this

www.gov.uk/apply-tax-free-interest-on-savings

For clarity, I am a basic rate tax payer. My pension exceeds £17.5K. I know I'm liable for the tax on the Interest because I have a letter from NSI telling me I am. I was curious about the ISA but I now understand that any interest accumulated there remains tax free. Thanks again.