Today The Telegraph reported on research by accountancy firm UHY Hacker Young, which found that 25% of its clients were on the wrong tax code. This mainly affected people with taxable income from savings, especially pensioners and higher rate tax payers.
The report found that people were often paying tax twice on the interest from their savings. If you use self-assessment, rather than Pay As You Earn tax deductions, you need to check with HMRC whether they have records of your income from savings and know exactly what to include on your tax return.
If you have modest savings, it is worth moving it from a regular savings account into a tax-free ISA (Individual Savings Account). You can save up to £5640 in cash, or up to £11280 in shares (or a combination of cash and shares). Instead of paying tax on the income at 20% for lower incomes, or up to 50% for higher rate tax payers, you get to keep all of the interest. This means it is very rare for a regular savings account to yield better returns than an ISA.
The report did note that HMRC says that 98% of people are paying the correct amount of tax, but I have often had problems with the system. If you have not worked for the entire tax year (beginning on April 6th), you may have paid too much tax before your Tax Code was calculated.
When you receive your P60 for the recently-ended tax year, use HMRC's tax checker to make sure you paid the correct amount of tax. If you discover you paid too much, contact them (with your National Insurance Number to hand) and ask them to check whether you are owed a refund. Do NOT leave it to them to sort out. It is supposed to be done automatically but I have ALWAYS had to do it myself, even a couple of years later! (Bear in mind if you ring you might be on hold for a while!!).