HMRC sending new tax codes to people with savings

A new tax year is well underway and with it HMRC will be taking the opportunity to adjust the tax codes of thousands, possibly hundreds of thousands, of people.

The new tax year kicked off on April 6, and each year, when the fiscal year resets, the tax office HMRC sends new tax codes out to people who have exceeded certain thresholds, such as the Personal Allowance for savings interest or one of the income tax brackets, such as the £50,270 band. One person who had been caught up by HMRC tax code changes posted in the UK Personal Finance sub-Reddit to ask about the issue.

They said: “Why has my tax code changed from 1250L to 115L? My tax code is currently 1250L however in the new tax year it’s going to be 1151L - the HMRC app says I have a deduction of £1,060 on my tax-free allowance, but I don’t understand why as I’ve been in the same job for years and my pay hasn’t changed since April.”

One user u/bluebells7788 solved the mystery as they said: “They’re doing this to everyone who has savings. Your bank has reported that you have savings and they have calculated based on the interest reported a deduction in your personal allowance.”

Indeed, HMRC does adjust tax codes for savings interest as well as other reasons at this time of year and your bank automatically reports your savings interest to HMRC if it's not inside an ISA.

The amount you can earn in savings interest depends on your income. For someone earning between £17,570 and £50,270, you can earn £1,000 of savings interest in a single tax year without owing tax.

This could mean £20,000 of savings at 5% interest rate for a year. But you could still go over the threshold with less than £20,000 - for example if you had £10,000 in a three-year fix and the fix ended, the interest would all be paid out in one lump sum in the same tax year, about £1,500, so you would owe tax on £500 of that.

Those earning between £12,570 and £17,570 could qualify for what’s known as Starting Rate for Savings, meaning they could earn up to £5,000 of interest tax-free.

Those earning £50,270 or more can only earn £500 of savings interest, owing tax on anything above that amount, while those earning £125,000 or more cannot earn any savings interest without tax on it.

According to charity Tax Aid, HMRC can also update your tax code later on in the year, as well as at the start of a new tax year. They said: "Please also note that in addition to sending a tax code for the beginning of the tax year, HMRC may update your tax code part way through the year if they are informed of a change in your circumstances."

HMRC says: “If you go over your allowance, you pay tax on any interest over your allowance at your usual rate of Income Tax.

“If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically. To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year.

“HMRC will send a tax calculation letter and tell you if you have a tax overpayment or underpayment.

“Your bank or building society will tell HMRC how much interest you received at the end of the year. HMRC will tell you if you need to pay tax and how to pay it."