Tax bills for savings interest you weren’t paid? HMRC still estimating earnings based on previous years despite 2020’s plunging rates
Savers are facing baffling tax bills for interest they haven’t actually earned.
HMRC estimates how much tax savers need to pay, based on how much interest they earned in previous years. But plunging interest rates mean savers have pocketed far less than usual this year.
And many people have also cashed in savings after experiencing financial difficulties, so are earning interest on a much smaller sum.
HMRC estimates how much tax savers need to pay, based on how much interest they earned in previous years
Yet correcting these estimates is often time-consuming and costly, as Money Mail reader Mr Lyman from Cambridgeshire discovered.
After going back and forth with HMRC for several months, he was finally forced to pay an accountant £90 for help.
It then emerged that the taxman had wrongly tried to charge him tax on £3,262 of savings interest, instead of the £1,905 he had actually earned.
He says: ‘Why should you pay £90 to prove to HMRC it has its figures wrong?’
The personal savings allowance means basic-rate taxpayers can earn up to £1,000 of interest a year tax-free.
And with rates so low, you would need to have more than £200,000 in a savings account at 0.5 per cent to bust the limit.
However, higher-rate taxpayers only get a £500 allowance, while additional rate payers get nothing.
Banks and building societies inform HMRC how much interest they have paid you throughout the year.
It is your responsibility to notify the taxman if you have a liability to pay tax. You should do this by October 5 following the end of the tax year on April 5.
Those who fill in a self-assessment tax form can include any interest earned on there.
If you do not, you should inform HMRC if you breach your allowance by calling 0300 200 3300 – and have your National Insurance number to hand.
Either way, HMRC will then inform you how much tax you owe.
The savings allowance means 95 per cent of savers no longer have to pay tax on their interest. But that still leaves more than half a million people who could be liable for a tax bill.
Kelly Sizer, senior technical manager of the Low Incomes Tax Reform Group, says: ‘Check your tax code carefully. Make sure any interest received and dealt with in the previous tax year has not automatically been included again in this year’s total.’
Rachel McEleney, associate tax director at accountancy firm Deloitte, says: ‘The tax point for savings income is the date of receipt. It does not matter when the interest accrues, just when it is credited to your account.’
Some savings accounts work out how much interest you earn daily and add it to your balance. But you don’t pay any tax on it until it is officially deposited in your account, typically once a year.
HMRC sends out about 28 million tax codes a year, mainly in February and March, to cover the next tax year starting in April.
On top of that, tax codes are sent out throughout the year as and when changes are reported by customers.
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