Hit by the savings tax trap: Double whammy of low rates and HMRC delay

More than 700,000 savers could be paying too much tax after interest rates plunged to record lows.

It is yet another blow for beleaguered savers already struggling to earn an income from their nest eggs. 

And long delays at HM Revenue & Customs (HMRC) means anyone attempting to correct their tax code and claw back overpayments by post could be forced to wait weeks for a response. Call wait times have also doubled since last year.

Double whammy: Lower rates means savers are set to earn less interest than in previous years and could be overcharged as a result

The taxman sends out around 28 million tax codes every year. These take into account all your income and determine how much you must pay in tax. 

But errors can creep in. If you fail to check yours carefully, you could end up paying too much or too little.

It has now emerged that hundreds of thousands of savers could be at risk of overpaying. 

This is because, unless told otherwise, the taxman automatically assumes you will earn the same amount of interest this year as in the years before.

But lower interest rates means savers are set to earn far less than in previous years.

HMRC says that 98 per cent of people do not pay tax on their savings. This is because much of their cash is in tax-free Isas, and any interest earned from ordinary accounts does not exceed their personal savings allowance.

Savers can invest up to £20,000 a year in an Isa. Basic-rate taxpayers also get a £1,000 a year personal savings allowance. 

This falls to £500 for higher earners, while additional rate taxpayers get nothing. But even if just 2 per cent of taxpayers face a tax bill on their savings, that is still around 713,000 people, according to HMRC figures.

The largest number of tax codes is sent out in February and March. Then there is another round in July, when HMRC receives more details from employers.

The taxman is only answering 44 per cent of the 1.2 million letters it receives each month within 15 days, compared with 70 per cent last year. A quarter of post is going unanswered for more than 40 days.

But banks and building societies do not report how much interest you have earned in the tax year ending April 2021 until the autumn. 

So the tax code you received earlier this year will assume you pocketed the same amount as before the Bank of England base rate plummeted from 0.75 per cent to 0.1 per cent in March 2020.

If you pay tax on your savings interest, your tax code letter will include a table spelling out how much HMRC estimates you will earn. If this information is wrong, you should ask for your tax code to be updated.

But the taxman is only answering 44 per cent of the 1.2 million letters it receives each month within 15 days, compared with 70 per cent last year. 

A quarter of post is going unanswered for more than 40 days. It also now takes an average of 14 minutes 41 seconds for HMRC to answer calls, more than double the 6 minutes 38 seconds it took last year.

Frank Haskew, head of tax at the Institute of Chartered Accountants in England and Wales, says: ‘We have been experiencing poor performance from HMRC helplines, including long waiting times, calls being cut off and significant delays in processing information. These problems increase the burdens and costs for taxpayers.’

Money Mail reader Colin Cartwright, 83, from Manchester, received his tax code for this tax year (April 6, 2021, to April 5, 2022) in February. 

But it was incorrect because HMRC had used the amount of savings interest he earned in the tax year 2019 to 2020, the latest figure it had on record, when working it out.

He is one of the 180,000 holders of National Savings & Investments Income Bonds, popular with pensioners, who suffered a cut from 1.15 per cent to 0.01 per cent in November. He earned £5,000 from the bonds in the year to April 2020.

This year, following the rate cut, he expects just £96. But his tax code assumed he would earn £5,000. 

The wrong code means he pays an extra £91 a month tax on his private pension, built up from a 44-year career as an engineer.

So far, he has paid £182 on monthly pension payments received on May 1 and June 1.

As Colin does not own a computer, he set out to tell HMRC by both post and phone that his tax code was wrong.

Between February and the end of April, he wrote four letters giving his up-to-date details and made several unsuccessful phone calls. 

His tax code was only adjusted after Money Mail stepped in, and next month in his pension payment he will get back the money he overpaid.

You can change your tax code online at gov.uk/personal-tax-account or phone on 0300 200 3300. You will need your National Insurance number to hand.

Alternatively, write to Pay As You Earn and Self-Assessment, HM Revenue and Customs, BX9 1AS.

An HMRC spokesman says: ‘We are sorry Mr Cartwright had to wait to have his tax code corrected. We have now applied the correct code and apologise for the inconvenience caused.’


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