As the new tax year starts, you may find yourself among the thousands of savers contacted by HMRC about tax on savings interest.

As you likely know, you do not pay tax on the money you save, however you may need to pay tax on the interest it earns. And with interest rates still relatively high and tax thresholds unchanged, it is becoming easier to cross that line without realising.

In fact, recent estimates suggest around 2.79 million people could receive a letter.

Why this is happening

If you have noticed better returns on your savings over the past couple of years, you are certainly not alone. Higher interest rates mean your money is likely earning more than it used to.

At the same time, tax thresholds have remained frozen. That combination means you may now be exceeding your allowance, even if your savings habits have not changed.

In short, you may be earning more interest without actively doing anything differently, and that is what can trigger a tax charge.

How the personal savings allowance works

The amount of interest you can earn tax free depends on your income.

• If you are a basic rate taxpayer, you can earn up to £1,000 in interest tax free. Anything above this is taxed at 20%.
  
  
• If you are a higher rate taxpayer, your allowance drops to £500, with interest above that taxed at 40%.
  
  
• If you are an additional rate taxpayer, there is no allowance, so all interest is taxed at 45%.
  
  

If your income is below the personal allowance, you may be able to earn more interest tax free, depending on your circumstances.

Why you could still be affected with modest savings

You might assume that only large savings balances are affected. In reality, it can happen sooner than expected. For example, if you are using a fixed rate savings account, interest is often paid at the end of the term. If that term runs over more than one tax year, all the interest can be counted in the year it becomes accessible.

That can push you over your allowance in one go. In some cases, even a relatively modest balance can be enough.

What to expect from HMRC

Your bank or building society reports the interest you earn directly to HMRC, so in most cases, you do not need to do anything yourself.

If tax is due, you will usually receive a P800 letter or a Simple Assessment. This will explain what you owe and how it will be collected. For many people, the amount is recovered through a change to your tax code, rather than a separate payment.

What you can do now

It is worth taking a few minutes to check how much interest your savings are generating, especially if you have money spread across different accounts.

You can review this through your bank statements or your Personal Tax Account on GOV.UK. This will give you a clearer idea of whether you are likely to exceed your allowance.

Need help?

If you think you may be close to the limit, it may be worth reviewing how your savings are structured. If you would like a second pair of eyes on your savings, or want to understand how the rules apply to you, call us on 01904 787 973 or book a call with our team.