The new tax year began on 6 April, but it’s not too late for tax codes to be updated. HMRC issues these changes to reflect any changes in savings or income, ensuring individuals pay the correct amount of tax. One key reason for these updates is the interest people earn from savings outside of ISAs, which is automatically reported to HMRC by banks and building societies.
Why Your Tax Code Might Change Mid-Year
According to Tax Aid, HMRC routinely updates tax codes to reflect changes in an individual’s financial situation, and they have the authority to do so throughout the year. As tax codes are primarily based on income, savings interest outside of tax-free ISAs can trigger an adjustment.
According to the Express, one individual on the UK Personal Finance Reddit forum shared their confusion over a tax code change from 1250L to 1151L, after receiving a notification of a £1,060 deduction from their tax-free allowance. Despite having no significant changes to their salary or employment, they were puzzled by the reduction.
A fellow Reddit user explained that this adjustment was likely due to savings interest being reported to HMRC. Banks report any interest earned outside of tax-free ISAs, and this amount is factored into tax codes. If a person’s savings interest exceeds the tax-free allowance, HMRC will adjust their tax code to ensure the correct amount of tax is paid automatically through their wages or pension.
How Savings Interest Affects Your Tax Code
The amount of savings interest you can earn before it becomes taxable depends on your income level. For those earning between £17,570 and £50,270, up to £1,000 in savings interest can be earned without incurring tax. However, those earning more than £50,270 are subject to a reduced allowance, and they can only earn up to £500 of interest before paying tax on the remainder. People with income above £125,000 face tax on all savings interest, regardless of the amount.
HMRC will calculate how much interest you’re likely to earn in the current tax year by looking at previous years’ figures, making adjustments where necessary. If you exceed your savings allowance, HMRC will notify you about the tax owed and provide details on how to settle it. The revised tax codes ensure that any owed tax is automatically deducted from your income.
For those who have been affected by these changes, HMRC will send a tax calculation letter detailing any overpayment or underpayment of taxes, along with instructions on how to resolve the situation.
If you receive a new tax code, it’s important to review it carefully to ensure accuracy. HMRC bases the new tax codes on the information they have received from your bank, so it’s essential that any savings interest reported is correct. If your circumstances change during the year, such as earning more interest or other income, HMRC may update your tax code again.
If you’re unsure about the changes to your tax code, it’s always a good idea to check your personal details and contact HMRC for clarification. Being proactive will help you avoid any surprises when it comes to tax time.
