Paying tax on savings interest is more complicated than you might think. Due to factors such as frozen personal savings allowances, high inflation and higher interest rates, more people than ever are finding themselves with an unexpected tax bill.

Those who earn more than £10,000 from savings and investments are required to complete a self-assessment tax return. For everyone else, tax is liable when interest on savings and investments exceeds the personal savings allowance. This is dependent on earnings and currently stands at £1,000 a year for a basic rate taxpayer, £500 for a higher rate taxpayer and nothing for an additional rate taxpayer. This also includes income from bank and building society interest.

Since April 2016 banks and building societies no longer apply tax directly to savings interest. Individuals are now responsible for contacting HMRC if any tax is due. Until recently this won’t have been an issue for the majority of savers. However, with savings rates increasing over the past three years, more people are now finding themselves exceeding the personal savings allowance. According to investment firm AJ Bell, 2 million savers were liable for tax on their savings in 2023/24. This is more than double the figure from three years earlier when it was 650,000. Research suggests this may rise further still by just under 900,000 by 2028/29.

If an individual has interest that needs to be taxed, they are supposed to register with HMRC within six months of the end of the tax year - unless HMRC sends them a tax computation. However, with a large increase in the number of computations that HMRC has had to process for 2023/24, it has only now finished issuing them, around five months after the registration deadline. In December of last year, HMRC updated its guidance to warn that those it has not contacted by 31 March 2025 should get in touch as soon as possible to avoid late filing fines.

For those not using self-assessment, HMRC has previously said it would use information gathered from banks and building societies to calculate any tax due on savings interest. However, HMRC has acknowledged that around a fifth of all bank accounts cannot be matched to a taxpayer record, leaving 20 per cent of accounts being missed. 

It is therefore unwise to sit and wait for HMRC to contact you if you suspect you might owe any tax on savings interest. As far as HMRC is concerned, the responsibility lies with you to calculate how much tax is payable. A failure to report a liability may result in penalty charges.

That’s why we are here to help.

If you suspect that your interest on savings may exceed the personal allowance - but you haven’t received any notice from HMRC – it is best to speak to one of our team to talk it through. Everyone’s situation is different and we can give you the right advice to suit your individual situation. It’s always better to have peace of mind – and avoid any nasty surprises in the form of unexpected tax bills further down the line.