Q: I’ve received a letter from HMRC stating I have a drop in my tax-free allowance, so my tax code will change from April. My salary has not increased this past tax year, so why the change?
A: HMRC sends updated tax codes throughout the year, not just at the start of the tax year. These updates reflect changes in personal circumstances, such as income shifts or savings interest earned. For you, it would appear to relate to the latter.
Banks report savings interest (outside ISAs) directly to HMRC. If your interest exceeds your Personal Savings Allowance, HMRC adjusts your tax code to collect the tax automatically.
Allowances depend on income:
£17,570 to £50,270 income – you can earn £1,000 savings interest tax-free
£50,270 to £125,000 income – you can earn £500 tax-free
£125,000+ income – you cannot earn any interest tax-free
