Across the UK, retired readers are reporting a small but stubborn new squeeze: an annual pension income trimmed by around £300, arriving not as a headline cut but as a quiet change in their tax code. HMRC’s updated approach to taxing savings interest is now live, and it’s pulling money out monthly via PAYE from many occupational or private pensions. For basic-rate taxpayers with interest above their Personal Savings Allowance, the maths is blunt. It feels like a haircut you didn’t ask for, taken in tiny snips. The bills haven’t gone up. The rules have shifted in the background, and the result lands in your bank balance.

The kettle clicks off in a chilly kitchen in Derby. Linda, 71, opens her pension statement, then the HMRC coding notice, and notices her monthly payout is lighter by a few pounds. Not disaster. Just less. She re-checks her bank interest figures—last year’s fixed-rate account did well—and stares at the line that says “estimated untaxed interest”. Her private pension is now being used to collect tax on that interest across the year. It’s clinical, tidy, and surprisingly personal. She reaches for a notebook and writes the new code. Then she reads the small print.

What’s changed — and why £300 vanishes

HMRC is now actively using bank and building society data to predict how much savings interest you’ll earn, then fold the expected tax into your PAYE code during the year. If you have a private or occupational pension paid through PAYE, that code change can reduce your monthly income. It’s not a new tax. It’s the same bill arriving earlier and in bite-sized chunks. For many basic-rate pensioners with interest above the **Personal Savings Allowance**, that adds up to roughly £300 over the year. The timing is tricky: the allowance freeze and bigger state pension upratings mean more people tip over thresholds they never used to notice.

Take a neat example. Say your bank interest for 2024/25 is estimated at £2,500 and you’re a basic-rate taxpayer. The first £1,000 is covered by the allowance, leaving £1,500 taxable at 20%. That’s £300. HMRC spreads that across the year by lowering your tax code, so your private pension pays you around £25 less each month. If the interest lands all at once—common with fixed-rate bonds—the coding still collects in-year. For Ron in Portsmouth, that meant a quieter December when he’d expected extra. He didn’t do anything wrong. The system is simply leaning forward, collecting as the income flows.

Here’s the logic. Your state pension is paid without tax being taken off at source. HMRC usually collects any tax due by adjusting the code on your other income—often a company or personal pension. That’s why you might see a K code or a smaller code number this year. If state pension plus private income plus predicted interest push you into tax, the code takes the strain. For those with only state pension income, HMRC can’t skim tax from it directly, so a bill (Simple Assessment) may follow instead. The £300 “cut” is taxation moved closer to the moment you’re paid, not a benefit shaved away.

What to do now — practical moves

Start with the numbers you can see. Log in to your Personal Tax Account, check your current **tax code**, and look for the line that lists “untaxed interest”. Compare that to the actual interest you expect across the tax year. If HMRC’s estimate is too high or too low, update it. You can also ask HMRC to stop collecting interest tax via coding and send you a bill instead, which some people prefer for cash flow. Then tidy your savings: use ISAs to shelter interest, and consider staggering maturities so big one-off interest hits don’t surprise your code next year.

Common errors? Assuming a 1-year fixed bond “earns monthly” for tax when it actually pays and counts at maturity. Thinking joint accounts double your allowance (they don’t; interest is usually split). Ignoring a line on a coding notice because the letter lands on a busy day. We’ve all had that moment when life admin piles up and the brown envelopes blur. Be kind to yourself and check one thing at a time. Let’s be honest: nobody actually does that every day. If the estimate looks far off—say you closed accounts or rates dropped—tell HMRC. They adjust faster than you think when the figures are clear.

It helps to hear it from someone who’s been there.

“I thought my pension had been cut,” says Maureen, 76, from Newcastle. “Turns out my savings did well, and the code just took the tax in dribs and drabs. Once I moved some cash into an ISA and corrected the estimate, the drop eased.”

Here’s a quick action frame you can screenshot:

Check your Personal Tax Account for “untaxed interest” and your current code.
Compare HMRC’s estimate with your bank statements and maturity notes.
Update HMRC if the estimate is off, or request a bill instead of coding.
Channel spare cash into Cash ISAs to ring-fence interest.
Keep a short note of interest earned this year. Your future self will thank you.

Looking ahead

Frozen thresholds until 2028, healthy savings rates, and triple-lock state pension rises all pull the same thread: more pensioners become taxpayers, and tax gets collected sooner. That doesn’t mean you have less overall; it means the timing is no longer on your terms. Some will decide to shelter more in ISAs, others will prefer a clean bill each autumn, not a leaner monthly payout. As rates ease, the pressure may, too, but habits formed now will outlast the cycle. The bigger point is trust—knowing what number will land in your account and why. Talk about it with family, share the screenshot of your code, and swap notes with friends. **Simple Assessment** might suit your temperament. Monthly coding might suit your budget. The rule now in force is technical. The decision about your cash flow is human.

Key points
Details
Interest for reader

HMRC now codes savings interest into PAYE
Banks report interest; HMRC estimates tax and adjusts your code in-year
Explains why pension payments look smaller without any “benefit cut”

£300 headline impact
Typical for basic-rate taxpayers with ~£1,500 interest above allowance (20%)
Helps you gauge whether your drop is in the right ballpark

Choices on collection
Update estimates, use ISAs, or ask HMRC for a bill instead of coding
Ways to regain control over timing and cash flow

FAQ :

Who is most likely to see the £300 cut?Basic-rate pensioners with an occupational or private pension via PAYE and savings interest above the allowance. HMRC uses the pension to collect the tax across the year.
Can HMRC take tax from my state pension?No. The state pension is paid gross. HMRC usually adjusts the code on other income, or issues a Simple Assessment bill if there’s nowhere to code it.
What if HMRC’s interest estimate is wrong?Update it in your Personal Tax Account or by phone. The code can be corrected mid-year so you’re not over- or under-deducted.
Could my reduction be more than £300?Yes, if your taxable interest is higher, or if you’re a higher-rate taxpayer with a smaller allowance. The figure scales with your untaxed interest.
How do I reduce the impact next year?Use Cash ISAs, plan maturities, keep a simple note of interest received, and consider requesting a bill instead of in-year coding if that suits your budgeting.