Category: Personal Savings
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Pensioners willnowpay tax on interest they havent yet received due to new Personal Savings Allowance (PSA) rules, which could force them to face a drop in their income.

Higher rate taxpayers were able to earn interest on savings up to pound;500 tax free, and basic rate taxpayersup to pound;1,000 thanks to the PSA which launched in April. But, anyone who goesover the allowance willpay tax at their marginal rate.

However, some savers going over their allowance are finding they owe tax on savings they dont have access to as it is tied up in a fixed-rate bond. Thats because tax on interest is due in the year it is paid, so you will have to shell outeven if the bond hasnt matured.

Older savers that exceed their PSA are particularly at risk from this tax bunglebecause HMRC will adjust their tax code to deduct money from their monthly pension or salary to clawback tax on the interest they are due to get from bonds that year.

This strange rule could leave them many hundreds of pounds out of pocket for up to 12 months or until their bond reaches maturity, which could be as long as five years, until the cash from their savings interest is paid.

[Related story:How does the Personal Savings Allowance work and how will it benefit you?]

How pensioners are being hit

BeforeApril 2016, banks and building societies took 20% tax off the interest it paid before reaching your account. But now they pay interest without taking any tax off at all.

This is great news - aslong as you receive less than pound;1,000 as a basic rate tax payer or pound;500 as higher rate taxpayer. However, if you earn more than your allowance, HMRC will start to collect what you owe by adjusting your tax code.

This has a significant impact on those with savings in fixed-rate bonds where the interest is paid annually. This is proving to be a big problem for many savers, especially pensioners, who tend to put their money into fixed-rate savings in order to generate an income.

The interest on NSamp;Is pensioner bonds, for example,is only paid when they mature.

The three-year 65+ Growth bond, which pays 4%, would return pound;400 a year based on the maximum pound;10,000 being put in.

So a basic rate taxpayer would see pound;6.66 a month taken from their salary or pension, even though they will only get the interest at the end of the three-year term.

Money cant be taken out of fixed-rate bonds without incurring a penalty so pensioners are being forced to pay out and live on less while they wait for their provider to pay out.

[Related story:How much tax should you pay on interest from savings and current accounts?]

What HMRC says

This loss of monthly income can have a major impact on pensioners who are already squeezed on their monthly income. However, HMRC stands by the practice.

A HMRC spokesperson told Money Mail: Changing an individuals tax code to collect tax due is a well-established means of collection that removes the need for many taxpayers to complete a tax return or contact us.

If anyone believes they will pay too much or too little tax, they can get their code changed.

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