With the new financial year having started this week, a significant number of UK savers are bracing for unexpected tax bills from His Majesty's Revenue and Customs (HMRC). As the tax year 2025-2026 commenced on Sunday, April 6, HMRC is set to assess individuals' savings and interest accrued over the past year. This could result in many receiving P800 letters, which detail any tax owed on their savings interest.
Although savers don’t pay tax on the money they’ve saved, interest earned over a certain amount is taxable. The thresholds for this tax are easier to hit than ever, thanks to rising interest rates. For basic rate taxpayers earning between £12,571 to £50,270 annually, the Personal Savings Allowance (PSA) allows them to earn up to £1,000 in tax-free interest. Anything above this amount incurs a 20% tax. Higher rate taxpayers, earning between £50,271 and £125,140, have a reduced allowance of £500, beyond which a hefty 40% tax applies.
For many, the reality is that having a pot of £3,500 or more in a savings account could lead to receiving a letter from HMRC soon. According to data from Paragon Bank, approximately 2.4 million fixed-term non-ISA savings accounts are set to mature in the next three months, with an estimated 887,000 of these accounts generating enough interest to incur tax payments.
It’s worth noting that basic rate taxpayers would need around £20,000 placed in a top easy-access savings account to exceed their tax-free allowance at current rates. For higher rate taxpayers, that figure is just over £10,000. However, the situation changes dramatically for those saving through fixed-rate accounts. If you opt for a fixed-rate savings account longer than a year, where interest is paid at maturity, all the interest is counted towards the final year’s PSA. This means that higher rate taxpayers with as little as £3,500 in a three-year fixed-rate account at 5% can easily exceed their allowance.
The types of savings interest that are subject to tax include interest from bank and building society accounts, credit union accounts, peer-to-peer lending, investment trusts, and even some life insurance contracts. However, savings in tax-free accounts like Individual Savings Accounts (ISAs) do not count towards the allowance.
As the new fiscal year begins, HMRC will start assessing what’s owed for the 2024/25 tax period. Banks notify HMRC of the interest each customer receives, which means if you owe tax, you’ll receive a P800 letter explaining how the money will be recouped. Typically, this is done through a deduction in your personal allowance, which will mean a change in your tax code. HMRC has stated that these letters can be sent at any time as information becomes available.
For those looking to avoid unexpected tax bills, checking your savings and understanding how interest is accrued is crucial. If you’re unsure whether you might be due a bill, estimates may be available through your Personal Tax Account on Gov.uk. Your bank or building society should also provide annual statements detailing how much interest you earned, along with a breakdown of what’s taxable.
In a recent statement, Derek Sprawling, managing director of Paragon Bank, emphasized the importance of using ISA allowances to maximize future returns. He noted that many maturing savers will likely not be able to match their previous interest rates when their fixed accounts come to an end.
For individuals with savings exceeding £3,500, the risk of receiving a tax bill is very real. If your income is over £50,270, the implications are even more severe, as the PSA drops to just £500. For those earning £125,000 or more, the PSA is eliminated entirely. This means that any savings interest earned will be taxed at your usual income tax rate, which can range from 20% to 45% depending on your earnings.
For example, if a basic rate taxpayer saves £21,000 in a straightforward savings account at a 5% interest rate over a year, they would generate £1,050 in interest, thus exceeding the £1,000 allowance and incurring tax. Similarly, for higher earners, a deposit of £11,000 in a savings account at a 5% rate would yield £550, nudging them above the allowance limit.
As HMRC prepares to send out P800 letters this month, many savers find themselves in a precarious position. The letters serve as a reminder that the financial landscape is changing, and savers must stay informed to avoid unexpected tax liabilities. The end of the tax year often brings surprises, and this year is no exception. With banks reporting interest payouts automatically to HMRC, it’s essential for savers to keep a close eye on their accounts and understand the potential tax implications.
HMRC has clarified the process for these notices, stating, "At the end of each tax year, HMRC sends customers an End of Year Tax Calculation - P800 if they have under or overpaid their taxes. This personalized letter indicates whether the recipient needs to pay more tax or is eligible for a refund, the amount involved, and how the payment or refund will be made." They also provide a detailed breakdown of the tax calculations to help recipients understand how the figures were determined.
In summary, as the new financial year unfolds, UK savers should be vigilant. With the potential for unexpected tax bills looming, understanding one’s personal savings situation and remaining informed about tax regulations is more important than ever. The financial landscape is shifting, and those who stay ahead of the curve will be better prepared for what lies ahead.
