Tax code changes

[tractorboy2]

I have had my tax codes changed due to unpaid tax on savings interest.
What I don't understand is why , my pension is less than my personal allowance and my understanding is that I should be able to receive up to £6k
in savings interest tax free. Starting rate of £5k and £1k personal savings allowance.
My letter makes it look like I'm not entitled to the starting rate.
This means I will have to pay a very small amount of tax this year.

[RobertT]

Without knowing any details it's hard to answer, but make sure you're factoring in all income you receive in any one tax year.

I think any tax due will be applied the following year. So if your tax code is changing now it may be because you received too much tax free interest in 2024/25?

If that doesn't help, I can only suggest you contact HMRC for clarification.


For anyone wanting to know about the starting rate for savings, there's more info here:

https://www.gov.uk/apply-tax-free-interest-on-savings
https://www.moneysavingexpert.com/savin ... e-savings/

[tractorboy2]

Hi RobertT

I rang the HMRC , and the person I spoke to told me that the untaxed interest had to be deducted from my personal allowance so that I didn't pay tax on it.I tried to explain that the starter rate hadn't been taken into account only the PSA , he said something about my earnings excluding savings interest being under my personal allowance affecting the starter rate , made no sense to me.

This is what my letter said.

Personal Allowance 12570
Less Untaxed Interest 3104 (Go to note 2)(takes in to account starter rate and PSA)(In my case only the PSA was)
Total Tax Free Amount 9466

Tax free amount used as follows
RMSPS 909L
RMPP 37T

The codes were changed based on 24/25 savings interest which is the figure above.
Banks only need to notify HMRC of interest paid by November which is why they change mid tax year.

[mrcurve]

I had a similar adjustment letter too, I have just paid the 24/25 interest bill, so it was a surprise, I guess they are catching up and collecting in the same year now because its showing as estimated, its less than £150 so it could be worse.

[RobertT]

I rang the HMRC , and the person I spoke to told me that the untaxed interest had to be deducted from my personal allowance so that I didn't pay tax on it.I tried to explain that the starter rate hadn't been taken into account only the PSA , he said something about my earnings excluding savings interest being under my personal allowance affecting the starter rate , made no sense to me.

Nor me.

If your earnings are over £12,570 that will affect the starting rate for savings, but not if they're under!

It sounds like they're factoring in some other income they think you've had, or previously not paid enough tax on.

[mrcurve]

yes my case might be different, my pension is a little above the allowance so I pay tax, and its tricky to get pension lump sums and avc into tax free isas staight away.

[SeanMc]

Pension Lump Sums are tax free?

[RobertT]

Pension Lump Sums are tax free?

They usually are.
Unless any gets paid out as a UFPLS, in which case 75% of that amount will be classed as income.

In practice, a lot of people will receive at least some of their Cash Balance as a UFPLS.

If you then put your lump sums into normal savings accounts, you might pay tax on the interest. But if you put them into ISA's, you won't.

[SeanMc]

In my experience all Royal Mail pension lump sums are tax free but the Cash Balance is paid as a UFPLS.

[SeanMc]

But if you put them into a savings account you will pay tax on the interest.

[RobertT]

In my experience all Royal Mail pension lump sums are tax free but the Cash Balance is paid as a UFPLS.

If you use the Cash Balance as intended, it would fund all the tax free lump sum with RMPP Age65 benefits for section C, and some of it for section A/B(because they also get one as standard).
With any remainder paid out as a UFPLS.

If you choose to fund the RMPP Age65 tax free lump sum by giving up some pension, then the whole Cash Balance will be paid as a UFPLS.

It's a choice you've got at the point of tasking your benefits.

[RobertT]

But if you put them into a savings account you will pay tax on the intetest.

Not if it's an ISA.
Or if your income is below £17,570 and you qualify for at least some of the starting rate for interest.(see links upthread)

If your income is above that, you still have a £1,000 per year tax free interest allowance. Which then reduces to £500 for higher rate tax payers.

[SeanMc]

Spot on.

[mrcurve]

One other option I can suggest, is if you have maxed out the isa allowance, you can put 50k into premium bonds, its not as good as an isa, but it is tax free.

[freespeech]

But if you put them into a savings account you will pay tax on the intetest.

Not if it's an ISA.
Or if your income is below £17,570 and you qualify for at least some of the starting rate for interest.(see links upthread)

If your income is above that, you still have a £1,000 per year tax free interest allowance. Which then reduces to £500 for higher rate tax payers.

Agreed....but if your tax free lump sum is over £20k then you won't be able to protect all of it from taxable savings interest. If it's over £45k it's probably inevitable that some will be taxed as you could put £20k into an ISA and the other £25k will use up your £1000 allowance even at a relatively low 4%......unless you stick the excess in premium bonds.