If you’re building personal savings, it’s useful to understand at what point you might need to pay tax on your funds. However, recently HMRC has begun to estimate the amount of interest due on your savings and collect it through your tax coding notice. So what do you need to know to avoid paying too much tax, or having to pay it earlier than you should?
Generally it’s possible to earn some interest from savings without paying tax. Currently there are a number of allowances which help shelter your savings from tax including:
- Personal Allowance – which this year stands at the standard rate of £12,570. No tax is due on income including from your salary, pension or from savings as long as they all remain under this threshold.
- The starting rate for savings – if you earn less than £17,570 you may be able to save up to £5,000 without paying tax on it. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
- Personal Savings Allowance – this currently allows £1,000 of interest (or £500 if you are a higher rate taxpayer) to be paid each year before any tax is due.
Any interest which is due has typically been calculated based on your self-assessment form and then collected. Yet recently HMRC has seemingly begun to alter tax coding notices, enabling tax on your fundsto be collected earlier or through the year.
If you’re not sure of your tax code you can find it:
- Online – you’ll need to sign in or create an online account at www.gov.uk/check-income-tax-current-year
- Using the HMRC app
- On your payslip
- On a ‘Tax Code Notice’ letter from HMRC
It’s important to carefully check your tax code each year, and make sure you aren’t being charged tax in advance – your circumstances may change through the year which may mean you might not be able to save and enjoy the interest you expected to.
If you are worried you are paying too much tax, or need support with your self-assessment Tax Return please get in touch.