Many UK savers may not realise that interest earned on savings accounts could be taxable. With HMRC increasing its focus on unreported savings interest, it’s essential to understand your tax obligations and avoid unexpected bills.
How Savings Interest is Taxed
Savings interest is subject to Income Tax, but most individuals benefit from the Personal Savings Allowance (PSA):
- Basic-rate taxpayers (those paying 20% tax) can earn up to £1,000 in savings interest without paying any tax on it.
- Higher-rate taxpayers (40%): Can earn up to £500 tax-free.
- Additional-rate taxpayers (45%): Have no PSA and must pay tax on all interest earned.
Interest earned beyond these allowances is taxed at your marginal rate.
Why is HMRC Issuing Warnings On Savings Accounts?
- Increased Interest Rates – Rising interest rates mean many savers are now exceeding their PSA, making them liable for tax.
- Automatic Reporting – Banks and building societies report interest earnings directly to HMRC, so failing to declare taxable interest could lead to penalties.
- Unpaid Tax Risks – If you owe tax on savings interest, HMRC may adjust your PAYE tax code or issue a self-assessment requirement.
How to Check If You Owe Tax
- Review your bank statements and annual tax summaries.
- Use HMRC’s Personal Tax Account to check reported interest.
- If you need to pay tax, it may be collected via PAYE or self-assessment.
Avoiding Tax Penalties
- Stay within your PSA by spreading savings across tax-free accounts like ISAs.
- Accurately report taxable interest in your self-assessment return if required.
- Check your PAYE code to ensure HMRC’s adjustments are correct.
Final Thoughts
With rising interest rates, more savers could be caught off guard by tax bills. Understanding your PSA and keeping track of your savings interest ensures you stay compliant and avoid HMRC penalties. If you are unsure, it is best to consult a tax professional for guidance. For more tax tips and updates, stay tuned!