HMRC Sends Out Warning Letters to Savers
Individuals in possession of savings amounting to £3,500 or more have been put on alert as His Majesty’s Revenue and Customs (HMRC) could soon be issuing unforeseen tax bills. HMRC possesses the capability to automatically track interest earned on savings from bank accounts. If this interest exceeds a certain threshold, taxpayers will promptly receive notifications of additional tax liabilities. The commencement of the new tax year 2025-2026 on April 6 marked the conclusion of the previous financial year. In the coming weeks, HMRC will evaluate individuals’ financial positions and send out tax bills to those liable for tax on savings accounts.
Unless held in a Cash ISA, savings accounts are automatically disclosed to HMRC by banks, thereby subjecting the interest earned to taxation. The Personal Savings Allowance permits individuals to earn up to £1,000 annually in savings interest tax-free, provided their income falls below £50,270. Earning £50,271 or more reduces this allowance to £500, while individuals earning £125,000 lose the allowance entirely. The tax owed is determined by income levels, interest accrued, and when the interest is paid out. Consequently, even with just £3,500 deposited in a fixed savings account for several years, the interest earned in a lump sum could surpass the £1,000 annual allowance, attracting attention from HMRC. High-income earners would face a 40% tax rate on each pound exceeding the allowance, rather than the standard 20%.
The possibility of surpassing the allowance is not limited to fixed-term accounts, as substantial savings held in non-fixed, easy-access accounts could also lead to taxation. For instance, savings of £11,000 at a 5% interest rate over a year could yield £550 – exceeding the threshold for tax liability if the individual’s income exceeds £50,270. Similarly, earning less than £50,270 but possessing savings of £21,000 with a 5% annual return would generate £1,050, surpassing the £1,000 allowance and necessitating tax payments to HMRC.
It’s important to note that various income sources contribute to the Personal Savings Allowance, including bank and building society accounts, unit trusts, peer-to-peer lending, and payment protection insurance. In case an individual exceeds their allowance, HMRC will adjust their tax code to automatically deduct the necessary tax. The tax authority estimates the current year’s interest based on the previous year’s earnings to determine the revised tax code.
As taxpayers await notifications from HMRC regarding their savings tax liabilities, being mindful of exceeding the Personal Savings Allowance and seeking professional advice for effective tax planning could help mitigate potential issues with tax bills arising from savings interest. Stay informed and proactive to ensure compliance with tax regulations and safeguard your financial interests.