HMRC Sends Letters About Tax on Savings Interest

HM Revenue and Customs (HMRC) is sending letters to many people in the UK. These letters are about tax owed on interest earned from savings. This is happening because interest rates have gone up, and more people are earning more interest than their tax-free allowance.
By Newsroom | UK Finance, Tax |

An estimated 887,000 individuals in the UK are being contacted by HM Revenue and Customs (HMRC) concerning tax owed on savings interest. These letters are being issued to savers whose accumulated interest has surpassed their Personal Savings Allowance (PSA). The precise amount of tax due is contingent upon individual earnings, the total interest generated, and the timing of its distribution.

Understanding the Tax Notices

HMRC is leveraging its automated systems to identify individuals whose savings interest exceeds the established tax-free thresholds. The communication from HMRC takes the form of demand letters, prompting recipients to address potential underpayments of tax. The tax authority is systematically reviewing financial situations to determine liabilities.

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  • Threshold for Contact: Letters are reportedly being sent to individuals with £3,500 or more in savings accounts, though the trigger is the interest earned exceeding the PSA, not the balance itself.

  • Factors Influencing Tax Due:

  • Personal income level

  • Total interest earned from savings

  • When interest was paid out (e.g., lump sum vs. annual payments)

  • Scope of HMRC's Reach: HMRC has the capacity to pursue tax owed from previous tax years if underpayments are discovered.

Types of Accounts Affected

The tax liability extends across a variety of savings and investment vehicles. HMRC has identified the following as potentially contributing to interest that could exceed the PSA:

  • Bank and building society accounts

  • Savings and credit union accounts

  • Unit trusts, investment trusts, and open-ended investment companies

  • Peer-to-peer lending

  • Payment protection insurance (PPI)

  • Government or company bonds

  • Life annuity payments

  • Certain life insurance contracts

The Personal Savings Allowance (PSA)

The PSA allows individuals to earn a certain amount of savings interest tax-free each year.

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  • Basic-rate taxpayers: Can earn up to £1,000 in interest annually without tax.

  • Higher-rate taxpayers: Have an allowance of £500 per year.

  • Additional-rate taxpayers: Receive no PSA and are taxed on all savings interest earned outside of tax-free accounts.

The PSA thresholds have remained unchanged for over eight years, while interest rates have risen, leading to more savers exceeding their allowances.

Fixed vs. Accessible Accounts

The structure of savings accounts can significantly impact how interest is treated for tax purposes.

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  • Fixed-term accounts: Interest may be paid out in a lump sum upon maturity. If a fixed account spans multiple tax years, the entire interest payment can be attributed to a single tax year, potentially pushing it above the PSA for that year.

  • Easy-access accounts: While interest is typically paid out more frequently, it is still possible for individuals to exceed their PSA even with these types of accounts, especially with rising interest rates.

HMRC's Detection Mechanism

HMRC possesses the capability to automatically detect interest accrued on savings. This allows them to identify accounts where interest earnings may have surpassed the PSA.

"HMRC has the ability to automatically detect interest on savings accrued in your bank account, and if you exceed a certain threshold, you will automatically be issued a notice for an additional tax bill."

Expert Commentary and Implications

The increased issuance of these letters is attributed to a combination of rising interest rates and stagnant PSA thresholds. This confluence of factors means that even modest savings balances can now generate interest liable for taxation.

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"Rising interest rates combined with frozen allowances mean that even moderate savings balances, particularly in fixed-term accounts, can now trigger a tax charge."

For those employed or receiving a pension, HMRC may adjust their tax code to automatically collect any owed tax.

Conclusion

HMRC's outreach signifies a concerted effort to ensure tax compliance on savings interest. The letters serve as a notification for individuals whose savings interest has, due to rising rates and unchanged allowances, potentially incurred a tax liability. Recipients are advised to review their savings interest and tax codes to understand their specific situation and address any discrepancies.

  • Key takeaway: The tax is on the interest earned, not the savings balance.

  • Actionable insight: Individuals should be aware of their PSA and how different account types affect interest calculation for tax purposes.

Sources Used

Frequently Asked Questions

Q: Why is HMRC sending these letters?
HMRC is sending letters because rising interest rates mean more people are earning more interest than their tax-free Personal Savings Allowance (PSA). They need to pay tax on the interest over this amount.
Q: What is the Personal Savings Allowance (PSA)?
The PSA is the amount of savings interest you can earn each year without paying tax on it. Basic-rate taxpayers can earn £1,000 tax-free, and higher-rate taxpayers can earn £500 tax-free.
Q: Do I need to have a lot of money in savings to get a letter?
Not necessarily. The letters are about the *interest* you earn, not the total amount in your savings account. If the interest you earned in a year is more than your PSA, you might get a letter.
Q: What should I do if I get a letter?
You should check how much interest you earned from your savings in the last tax year. Compare this to your Personal Savings Allowance. If you owe tax, you may need to tell HMRC or they might change your tax code to collect it.
Q: Can HMRC ask for tax from past years?
Yes, if HMRC finds that you have not paid enough tax on your savings interest, they can ask for the tax owed from previous tax years.