The Lemon Fool

With the significant rise in interest rates, many people will now receive savings interest above their personal savings allowance (which is £1,000 for basic rate taxpayers).

What is the mechanism for collecting this tax? Does the individual concerned suddenly need to complete an HMRC self assessment return?

newlyretired

A few interesting comments here.

https://community.hmrc.gov.uk/customerf ... 155d9c7b3d

newlyretired wrote:What is the mechanism for collecting this tax? Does the individual concerned suddenly need to complete an HMRC self assessment return?

Automatically reported by the banks and then a change of tax code if tax to pay.

No way would HMRC want an additional tens of thousands of people needing to submit a tax return to pay a few pounds.

AF62 wrote:

newlyretired wrote:What is the mechanism for collecting this tax? Does the individual concerned suddenly need to complete an HMRC self assessment return?

Automatically reported by the banks and then a change of tax code if tax to pay.

No way would HMRC want an additional tens of thousands of people needing to submit a tax return to pay a few pounds.

But what about individuals who do not have a tax code? That must be most people who do not work and do not (yet) receive an occupational pension. I have not had a tax code for nearly 25 years!

Lootman wrote:But what about individuals who do not have a tax code?

Then if they already submit a self-assessment return they include it on that, and if they don't HMRC send them a bill.

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

The changing the tax code method sweeps up the vast majority, existing self-assessment doesn't add to the numbers doing it, and sending a bill can be automated and is easier for the recipient than doing self-assessment.

Lootman wrote:But what about individuals who do not have a tax code? That must be most people who do not work and do not (yet) receive an occupational pension. I have not had a tax code for nearly 25 years!

AFAIK everyone gets the standard personal allowance unless otherwise applies.
In effect, you are born with one

AF62 wrote:

Lootman wrote:But what about individuals who do not have a tax code?

Then if they already submit a self-assessment return they include it on that, and if they don't HMRC send them a bill.

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

The changing the tax code method sweeps up the vast majority, existing self-assessment doesn't add to the numbers doing it, and sending a bill can be automated and is easier for the recipient than doing self-assessment.

Yes, that was my point really, that there is a "middle" area of people who do not have a PAYE code but also do not need to self-assess. If you live off investment income and/or your only pension is a state pension, then you probably will not have a PAYE code.

For them a situation like this would be resolved by correspondence leading to a bill.

In my case I have to do SA anyway. But I am very happy to not have a PAYE code, and therefore have zero tax withholding.

pje16 wrote:

Lootman wrote:But what about individuals who do not have a tax code? That must be most people who do not work and do not (yet) receive an occupational pension. I have not had a tax code for nearly 25 years!

AFAIK everyone gets the standard personal allowance unless otherwise applies.
In effect, you are born with one

A PAYE Tax Code is not the same as the personal allowance. One is a mechanism for calculating deduction of tax at source, the other a tax allowance. For any one not having tax deducted at source, they won't have a PAYE code - eg if your only income is state pension + dividends + interest, there is no mechanism for deducting tax at source and so no tax code.

scrumpyjack wrote:

pje16 wrote:AFAIK everyone gets the standard personal allowance unless otherwise applies.
In effect, you are born with one

A PAYE Tax Code is not the same as the personal allowance. One is a mechanism for calculating deduction of tax at source, the other a tax allowance. For any one not having tax deducted at source, they won't have a PAYE code - eg if your only income is state pension + dividends + interest, there is no mechanism for deducting tax at source and so no tax code.

Indeed and I imagine that is a common situation here i.e. Lemons who retire early and do not claim an occupational pension. They will have no PAYE code. So if interest income pushes them over the level of the personal allowance, as described by the OP, then this will have to be handled manually if there is also no SA.

scrumpyjack wrote: eg if your only income is state pension + dividends + interest, there is no mechanism for deducting tax at source and so no tax code.

With the reduction in dividend tax allowance and the increase in interest rates, there will likely to be tax due where none previously arose from those in that position with unsheltered dividends and interest. The question is how HMRC will seek to collect it from those not completing an annual SA100.

Theoretically it is the duty of the taxpayer to realise tax is due and complete an SA return and pay it! That duty is not dependent on HMRC chasing you!

scrumpyjack wrote:Theoretically it is the duty of the taxpayer to realise tax is due and complete an SA return and pay it! That duty is not dependent on HMRC chasing you!

Its not really ‘theoretical’
Its the way it works

Its YOUR responsibility to declare your liability to tax

Lootman wrote:In my case I have to do SA anyway. But I am very happy to not have a PAYE code, and therefore have zero tax withholding.

But IIUC you don't have any relevant income to have any withholding from. You're not earning and you aren't drawing a pension And there is no withholding on savings interest or dividends, so the fact that you don't have a PAYE code is neither here nor there to you having zero tax withholding. You'd have that even if you had a PAYE code as you don't have any taxable-at-source income.

Don't forget that you may qualify for the starting rate on savings.

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

If your non-savings income is less than £17570, you get £5000 of savings charged at 0%, this is in addition to the £1000 tax exempt amount. Very useful for early retirees!

Hi Folks,
That's interesting about not needing to complete a Self Assessment (SA) even if interest is marginally over £1000. We've completed SA for years as we had a caravan which was rented out. That went years ago. We now have my parent's house which was rented and is now in the final stages of being sold, end of June 2023.
BMrs B and I are both retired with state and company pensions, various investments. Non ISA ones will just about creep over the £1000 threshold.
Been on the Gov.UK site to checkout 'Do I need to complete a Self Assessment' answering No, No, No to everything and yes to the 'over the £1000 threshold but below £2500 (not sure where that comes in, but that was there question). Assuming the house will be sold, CGT paid etc by next tax year end, complete an SA for 2023-2024 to report all that.
If I read all that correctly we won't have to complete an SA for "2024-2025. I'll check with HMRC but that will be another job less.
Nice spot,
Ray.

Hi Folks,
Just a thought re stopping Self Assessment (SA) reporting and Gift Aid. At present I report my Gift Aid amounts (I do pay tax). Am I correct in that all it does, for me as a Basic Rate payer, is move the Higher Tax rate 40% threshold? No tangible benefit until my income reaches the Higher Tax band 40%, which is unlikely.
Not completeing a SA will make no material difference to me?
Ray.

It may be useful to look at this current thread covering a similar question:

https://lemonfool.co.uk/viewtopic.php?p=592921#p592921

Gersemi wrote:Don't forget that you may qualify for the starting rate on savings.

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

If your non-savings income is less than £17570, you get £5000 of savings charged at 0%, this is in addition to the £1000 tax exempt amount. Very useful for early retirees!

I haven't worked for >7 years and had minimal annual interest income. This year we sold our house and I put the vast majority of the proceeds into my name in NS&I Direct Saver as my wife is an additional rate taxpayer. I've totted up my 22/23 interest and it comes to £17,345. As it is below the above allowances then I don't think I have any tax due to be paid. However, when completing the 'do I have to file a tax return' online questionnaire by answering 'do you have more that £10,000 of interest income?' with a YES it says I should submit a tax return? Yet, when I look at my dashboard for this year it just says HMRC will calculate your tax and be in touch. Don't want a penalty but don't want to waste everyone's time either by doing so or attempting a phone call which HMRC says I don't qualify to do anyway!

What should I do?

Gersemi wrote:Don't forget that you may qualify for the starting rate on savings.

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

If your non-savings income is less than £17570, you get £5000 of savings charged at 0%, this is in addition to the £1000 tax exempt amount. Very useful for early retirees!

Just seen that here https://uk.finance.yahoo.com/news/tax-c ... 33299.html

Was new to me so, I thought I'd post it here, only see you beat me to it

Higher-rate taxpayers can only earn £500 of interest from their savings before having to pay tax. For basic-rate taxpayers, £1,000 can be earned before tax is charged. Those who earn £18,570 or less may also be able to benefit from the starting rate for savings; this allows lower earners up to £5,000 tax-free savings interest – in addition to the personal savings allowance. The £5,000 reduces by £1 for every £1 earned over £12,570 (the personal allowance).

Additional rate taxpayers do not get an allowance.

So a non earner gets £12,570 personal allowance exemption, plus £1000, plus another £5,000, and a further £1000 of dividends tax exemption. £19,570 total. And a further £6000 in capital gain tax exemption (reducing to £3000 next year), making £25,570. £51,140 for a couple.