High interest rates are great for savers; however people must be aware of the tax implications involved. This is especially true as the combination of rising rates and the frozen personal savings allowance increases the chance of incurring a tax liability. It’s a perfect storm for savers.
Many people will receive a letter from HMRC informing them that their savings will incur tax. This knowledge arises from notifications from banks and building societies. (They are obliged to inform HMRC of interest paid to account holders.) It’s important to note that taxpayers who don’t receive a letter from HMRC may still incur a penalty if they don’t pay the right amount of tax.
HMRC stated: ‘It’s an individual’s responsibility to ensure they pay the correct tax, and they should let us know as soon as possible if they believe they haven’t. It is our duty to collect taxes to fund public services.’ Those who were not contacted by HMRC by 31 March must get in touch as soon as possible to avoid late filing fines.
If the total investment income is less than £10k and the individual does not need to do tax returns for any other reason, then they have a choice of contacting HMRC and asking them to adjust their tax code or completing a tax return
The Personal Savings Allowance (PSA) is influenced by the rate of income tax paid. The current PSAs are:
- Basic-rate (20%) taxpayers: can earn £1,000 in savings interest per year with no tax.
- Higher-rate (40%) taxpayers: can earn £500 in savings interest per year with no tax.
- Additional-rate (45%) taxpayers: £0 – no allowance given.
505,000 basic rate taxpayers are already paying tax on their savings interest, having exceeded the £1,000 PSA. The higher tax rate affects anyone earning over £52,270 during the tax year. 344,000 savers can only earn £500 interest tax free a year. This threshold has remained frozen since it was first introduced in April 2016.
If the personal saving allowance had risen in line with inflation the £1,000 figure would now be £1,360, and higher rate PSA would be £681.
Investment platform AJ Bell found that 2.07 million people will face a tax bill on savings interest in the 2024-25 tax year, up from around 650,000 just three years ago.
If a person’s total investment income is less than £10k and they do not need to submit a tax return for any other reason, they can either:
- ask HMRC to adjust their tax code, or
- complete a tax return.
‘The combination of higher interest payments and frozen personal savings allowances means many people owe tax and simply don’t know about it,’ says Felicity Reader, Accounts Senior at re:accounts Chartered Accountants in Stevenage. ‘Some will find out when HMRC writes to them, whereas others may not realise until they have incurred penalties. It’s best to be aware of the interest you’ve earned and contact HMRC to avoid fines. Banks and building societies issue annual interest statements. These are a good starting point to determine any additional taxed owed.’
Does the interest earned by your savings exceed the personal savings allowance?
Would you like to comply with HMRC’s requirements while minimising your tax liability?
Talk to the team at re:accounts in Stevenage. Our tax gurus will ensure you don’t pay a penny more tax than you need to. We love saving our money for our clients!
