- HMRC to issue tax bills to savers with £3,500+ who exceed tax-free interest allowances
- Interest rate rises and frozen tax thresholds are pushing more people into paying tax
- Tax bills depend on income tax band and type of savings account chosen
With a new financial year having started this week, a number of UK savers could find themselves with an unexpected HMRC bill in a matter of days.
Although you don’t have to pay tax on money you’ve saved, you are taxed on interest earned over a certain amount — and it’s easier than ever to fall into this bracket.
Not only have interest rates been on the rise for years, frozen tax thresholds mean 120,000 more people will have to pay in 2025/26.
An estimated 2.79 million Brits are expected to receive a letter in the coming weeks, including 1.42 million basic rate taxpayers and around 900,000 on the higher rate.
What yours will entail all depends on the type of account you have and your income tax band.
But anyone with a pot of £3,500 or more in their nest egg could be stung , so it’s worth checking now to avoid a nasty surprise.
Do you think the personal savings allowance thresholds should be increased?
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Yes, they should be adjusted to current interest rates.
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No, the current thresholds are fine.
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I'm not sure.
How much tax do you pay on savings interest?
Basic rate taxpayers — earning £12,571 to £50,270 annually — are allowed to earn £1,000 a year in tax-free interest, with anything above this amount charged at 20%.
However, the personal savings allowance (PSA) for those on the higher rate— with an income of £50,271 to £125,140 each year — is £500, beyond which a 40% share is incurred.
Meanwhile, higher rate taxpayers bringing in over this amount have no PSA at all, so the taxman takes 45% of all savings interest.
Non-taxpayers earning less than £12,570 income per year may be able to earn as much as £18,570 in savings interest tax-free, but it all depends on how much income you do have from the likes of pensions or work.
Then there’s the different type of account: according to Money Saving Expert (MSE), those on the basic rate would need around £22,000 placed in a top easy-access savings account to exceed the allowance at current rates, with the figure for higher rate taxpayers sitting just over £11,000.
However, if you save through a fixed-rate account, which locks your cash away for a set time, the threshold will be far lower.
Because you’re taxed on savings interest in the tax year you can access it, when you opt for a fixed-rate savings account longer than a year where the interest is paid at maturity, all the interest is counted towards the final year’s PSA.
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So, higher rate taxpayers who put as little as £3,500 into a three-year fixed rate account at 5% would earn £500 by the end of the term, while for those on the basic rate you’d need roughly £7,000 put away.
Types of savings interest subject to tax
Your allowance applies to interest from:
- some life insurance contracts
- bank and building society accounts
- savings and credit union accounts
- unit trusts, investment trusts and open-ended investment companies
- peer-to-peer lending
- trust funds
- payment protection insurance (PPI)
- government or company bonds
- life annuity payments
Savings in tax-free accounts like Individual Savings Accounts (ISAs) and some National Savings and Investments accounts do not count towards your allowance.
Visit the UK Government website for more information.
According to Paragon Bank, 883,000 savers on the higher rate had generated enough interest to incur a tax payment, with an average bill of £2,030, while 1.42 million earning less than £50,270 a year will face an average £641.
The number of people in these brackets being charged has gone up 128% and 132% respectively since 2022/23 — which the company’s head of savings, Andrew Wright, says is ‘likely being driven by retirees’ who have ‘modest incomes but meaningful savings balances’.
‘With tax on savings income due to increase from April 2027, that pressure will only intensify at a time when households are still contending with the effects of inflation,’ he comments.
‘More mature savers value the stability of cash and have saved prudently over many years to build financial resilience, so it’s unfair they are being punished through a tax system not initially designed for them.’
When will I find out if I owe tax on my savings?
As the new fiscal year began on Monday, April 6, HMRC will now begin assessing what’s owed for the 2025/26 tax period.
Banks notify the taxation service of the interest each customer receives, with Lloyds Bank explaining: ‘HMRC will, in turn, complete any necessary calculations and changes.’
If it finds you do owe tax, you’ll receive a P800 letter (or Simple Assessment depending on your circumstances) explaining how the money will be recouped; typically through a deduction in your personal allowance which will mean a change to your tax code.
HMRC says these letters ‘can be sent at any time as information becomes available’, but if you want to work out whether you could be due a bill, estimates may be available through your Personal Tax Account on Gov.uk.
Alternatively, your bank or building society should provide annual statements detailing how much interest you earned, and some also include a breakdown of what’s taxable or not.
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