Households with £3,500 or more in savings are being warned they could face an unexpected tax bill from His Majesty’s Revenue and Customs (HMRC). The tax authority has the ability to automatically detect interest accumulated on savings generated by bank accounts, and if the interest surpasses well-defined thresholds, you could receive notice of additional tax owed.
The Personal Savings Allowance permits basic-rate taxpayers to earn up to £1,000 annually from savings interest without being taxed, provided their income is below £50,270. This allowance reduces significantly, dropping to just £500 for those earning more than £50,271, as outlined by Express.co.uk.
With many fixed savings accounts currently offering interest rates of around 5% or even higher, there's potential for those investing £3,500 to earn upwards of £500 over time. For example, if you deposit £3,500 at 5% interest for three years, you might see total interest exceeding £500, especially since the interest is paid out all at once at the end of the term. With this payout, even slight breaches of the allowance would likely trigger communication from HMRC.
For individuals classified as higher earners, the tax burden can be particularly steep. Should you exceed the £500 threshold by just £100, you could find yourself liable for £40 of tax as higher earners face a 40% rate on every pound over the allowance—not just the typical 20% taxed on basic-rate income.
HMRC has identified numerous sources of income contributing to your Personal Savings Allowance, including bank and building society accounts, credit union accounts, unit trusts, investment trusts, peer-to-peer lending, and more. Each source can contribute to the total interest you receive, thereby affecting the tax owed if your savings interest exceeds your allowance.
The Government has detailed the following income sources included under your Personal Savings Allowance:
- Bank and building society accounts
- Savings and credit union accounts
- Unit trusts, investment trusts, and open-ended investment companies
- Peer-to-peer lending
- Trust funds
- Payment protection insurance (PPI)
- Government or company bonds
- Life annuity payments
- Some life insurance contracts
HMRC cautions about the significance of going over your allowance: "If you go over your allowance, you pay tax on any interest over your allowance at your usual rate of income tax." They also stress, "If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically." This means HMRC will estimate potential earnings from interest based on how much you accrued the previous year, adjusting your tax code accordingly.
It's also important to be mindful of tax-free savings avenues like Individual Savings Accounts (ISAs), as these do not contribute to your allowance. The deadline for addressing any potential discrepancies or issues with your tax can be as vibrant as April, when the current tax year concludes.
Considering the recent warnings from HMRC, awareness of your savings and potential tax repercussions is more substantial than ever. Being proactive about how much interest you may accumulate can help prevent surprises when it’s time to confront the tax man. Savers are strongly encouraged to monitor their total interest income closely to avoid falling victim to unexpected tax liabilities.