I owe loads of tax

[Backbag]

In theory my tax affairs are straightforward. I have a job, a small pension and some interest income.

I pay tax at source on the job and the pension and my tax code is adjusted for the interest income. You don't need to tell them what your interest income is, the banks do that.

This year I have so far received eight, 8! tax code letters adjusting my tax code to recoup the tax due on the interest. That's fine, except why so many different attempts to calculate it?

Since interest rates increased this additional income has nudged me just into higher rate tax.

As of the end of May, I am leaving my job and will be living off the pension and interest income, so they won't be able to tax my job for the money I owe. I'd rather not have my pension income reduced to nothing (would they do that?).

I'd like to just pay what I owe and start a fresh. How would I go about doing that?

That sounds frustrating. I hate uncertainty so I’ve decided to self assess so I can declare all my interest straight up and pay what I owe.

You are likely to be overpaying tax at this moment if your income reduces during the tax year. Even with tax code changing this may not balance out until tax year end at which point you may get a refund. It is unlikely that you will be underpaying tax. Do you have income from both private and state pension?
State Pension is not taxed at source - this tax is likely being collected through your employment and once you stop, this will be need to be collected from your private pension, if you have one.

No I'm not state retirement age yet.

Phone them. It’s likely they have estimated your interest tax, on what you paid during the last tax year. I phoned them and told them I was dumping it in ISAs this year and giving a lump sum away. So they redid my code.

It may be best to register for self assessment then get it all resolved after the end of the tax year (if you can afford that). A few years ago I was made redundant and ended up with a few jobs on an emergency tax code because HMRC had no idea what was going on. I got a fair amount back when I did my self assessment (the first year I did it as soon as I could rather than wait to later in the year!)

I don't meet the criteria for self assessment, but I can do it anyway?

I think you can self assess anyway and it sounds like you could meet the criteria - if you have a private pension and are in the 40% tax bracket you need to do it to get the extra tax relief I believe.

Earning just over the 40% tax threshold can be tricky as you can suddenly have your £1000 tax free allowance reduced to £500 - if you have savings with different banks, the tax code changes could have been triggered as each bank has reported your interest received.

I would phone/message HMRC, tell them that your income in 2025/6 will be significantly lower than the previous year and you'd like to pay the tax owed for 2024/5 so you know where you are going forwards - there's a simpler version of a tax return that might be more appropriate, but even if you need to do a tax return, it's very easy - at the start they just ask you what sort of income you need to report and then only ask the questions relating to that.

Just checking that you have as much money as possible in cash ISAs, so that some of your interest isn't taxed? Plus if you do still end up paying tax on interest, it might be worth considering premium bonds, or even having some of your money in S&S ISAs, if you don't need it for a few years.

can I add that it is much easier to liaise with HMRC on personal tax stuff in the App. You can do the adjustments mentioned above in there. Saves waiting for 2 hours to speak to someone who does not have a clue!

We are retired and tax due from interest gets taken off our private pensions. I get a letter from my pension provider every time there is a change, but my DH doesn’t receive anything. We are both registered with Gov.uk so check our account occasionally to make sure everything is correct. I wouldn’t register as self employed if you are not going to be working, you will only end up getting reminders to complete a tax return.

Yes, consider putting your savings in an ISA if they’re not already, then you don’t pay tax on the interest.

Also is it worth making some more pension contributions this year to bring you under the higher rate tax threshold? (Assuming you might still have a workplace pension open?)

And yes the app/online is much easier!

If the interest income has only just nudged you into higher rate tax, is it even very much tax to pay? Have you factored in your £500 tax free allowance for savings interest? (£1000 if you nudge yourself back into basic rate by making some more pension contributions)

I don’t meet self assessment criteria anymore but I’d like to continue and my accountant says I can so that’s the plan for last tax years return!

I would self assess. Although the banks do tell Hmrc the interest paid, the calculations I have seen haven't always been accurate.