HMRC Savings Account Tax Warning

Could Your Savings Trigger an Unexpected Tax Bill? Here's What You Need to Know

If you have savings of £3,500 or more, you may be at risk of receiving an unexpected tax bill from HMRC. With the start of the new tax year on 6 April 2025, HMRC is beginning to assess savings interest earned during the previous financial year.

Many individuals are unaware that interest generated from savings accounts — unless held in a Cash ISA — is automatically reported to HMRC by banks and building societies. If the interest received exceeds your Personal Savings Allowance (PSA), HMRC may issue a notice for additional tax owed.

What is the Personal Savings Allowance?

The PSA allows basic rate taxpayers (those earning under £50,270) to earn up to £1,000 in interest tax-free. For higher rate taxpayers (earning between £50,271 and £125,139), this allowance is reduced to £500. Additional rate taxpayers (earning £125,140 or more) have no savings allowance at all.

Even modest savings can exceed the allowance, depending on how and when interest is paid. For example, £3,500 placed in a 3-year fixed savings account at 5% interest would generate over £500 in interest — all paid out in one lump sum at the end of the term. This amount would exceed the PSA for a higher-rate taxpayer and trigger a tax charge.

How Tax on Savings is Collected

If your total interest income exceeds your allowance, the excess is taxed at your usual income tax rate — 20% for basic rate, 40% for higher rate, and 45% for additional rate taxpayers. HMRC typically collects this tax automatically by adjusting your PAYE tax code based on the interest reported in the previous year.

Direct from HMRC:

“If you go over your allowance, you pay tax on any interest over your allowance at your usual rate of income tax. If you're employed or get a pension, HMRC will change your tax code so you pay the tax automatically.To decide your tax code, HMRC will estimate how much interest you'll get in the current year by looking at how much you got the previous year.”

Sources of Taxable Interest

Interest from the following sources counts towards your PSA:

• Bank and building society accounts

• Savings and credit union accounts

• Unit trusts and investment trusts

• Open-ended investment companies

• Peer-to-peer lending

• Trust funds

• PPI compensation interest

• Government or corporate bonds

• Life annuities and some life insurance contracts

  
  
  
  
  
  
  
  

How We Can Help

If you’re unsure whether you’ve exceeded your allowance or would like support understanding your tax position, we can help. We specialise in working with individuals, directors, and owner-managed businesses to ensure they remain compliant and tax-efficient.

We offer a free, no-obligation consultation — either locally in Bath or online — to assess your situation and explore how we can support your financial needs.