Hassan Mohiuddin
The HM Revenue and Customs (HMRC) has issued an important warning for savers across the UK about the potential tax implications of interest earned on their savings accounts. With rising interest rates increasing returns on savings, more individuals risk exceeding their Personal Savings Allowance (PSA), which could lead to unexpected tax bills. The HMRC’s warning aims to remind savers to track their interest earnings and stay compliant with tax laws.
This article explains what the HMRC warning on savings accounts entails, why it matters, and what steps savers can take to avoid tax issues.
What Is the HMRC Warning on Savings Accounts?
The HMRC’s warning highlights that UK savers must account for the taxability of their savings interest, especially as rising interest rates lead to higher earnings.
1. Taxable Interest on Savings
While many people assume that their savings interest is automatically tax-free, that’s not always the case. Interest earned beyond the Personal Savings Allowance (PSA) is taxable and must be declared to HMRC.
2. Increasing Tax Risks
With the Bank of England raising interest rates to combat inflation, even moderate savings balances could generate taxable interest, pushing savers beyond their PSA.
3. Automatic Reporting
Most banks and building societies automatically report interest earned on savings to HMRC, meaning savers could face penalties for failing to declare taxable amounts.
Also Read: HMRC Savings Account Warning: What You Need to Know in 2024
Understanding the Personal Savings Allowance (PSA)
Introduced in 2016, the PSA provides a tax-free buffer for savings interest. However, its limits vary depending on your income tax band.
1. PSA Limits
- Basic Rate Taxpayers (20%): Can earn up to £1,000 in interest tax-free each year.
- Higher Rate Taxpayers (40%): Have a reduced allowance of £500.
- Additional Rate Taxpayers (45%): Do not qualify for a PSA and must pay tax on all interest earned.
2. How It Works
- The PSA applies to all non-ISA savings accounts, including current accounts, fixed-rate bonds, and regular savings accounts.
- Once interest earnings exceed the PSA, the surplus is subject to income tax based on your tax band.
Who Is Affected by the HMRC Warning?
The HMRC warning is particularly relevant to individuals who:
1. Hold Large Savings Balances
Savers with substantial amounts in high-interest accounts are at greater risk of exceeding their PSA.
- Example: A £20,000 balance in an account offering 5% interest generates £1,000 annually, which is fully taxable for higher-rate taxpayers.
2. Invest in Fixed-Rate Bonds
Fixed-rate bonds often pay higher interest rates, and lump-sum interest payments at the end of the term can push savers above their PSA.
3. Joint Account Holders
Joint account holders split the interest earned on their accounts equally, meaning both parties need to monitor their PSA limits.
Why Is This Warning Significant Now?
1. Rising Interest Rates
With interest rates reaching levels not seen in over a decade, savings accounts are offering much higher returns. While this benefits savers, it also increases the likelihood of exceeding the PSA.
2. Increased HMRC Scrutiny
HMRC has stepped up its efforts to ensure taxpayers comply with the rules on savings interest. Automatic reporting from financial institutions means that HMRC has full visibility of interest earnings, leaving little room for error.
Also Read: £1,739 Extra Universal Credit Payment: What You Need to Know
How to Stay Compliant with HMRC
Avoid tax pitfalls by understanding your obligations and managing your savings effectively.
1. Track Your Interest Earnings
Regularly review your account statements to calculate how much interest you’ve earned. Many banks provide annual summaries that can help you track your total.
2. Use Tax-Free Savings Accounts
Consider using tax-efficient savings options such as Individual Savings Accounts (ISAs) to grow your money without worrying about exceeding the PSA.
3. Declare Taxable Interest
If your interest earnings exceed your PSA, you must declare the taxable amount to HMRC.
- Self-Assessment Tax Return: Submit a tax return if required, detailing all taxable interest earned.
- HMRC Online Portal: For individuals who don’t file a full tax return, taxable interest can be declared through HMRC’s simple online reporting system.
Tax-Free Savings Options
Savers looking to minimize tax liabilities can explore the following tax-free options:
1. Individual Savings Accounts (ISAs)
ISAs offer tax-free returns on interest, dividends, and capital gains.
- Annual Allowance: You can deposit up to £20,000 annually across cash ISAs, stocks and shares ISAs, and other types.
2. Premium Bonds
NS&I Premium Bonds provide tax-free prizes instead of interest, making them a popular option for those seeking tax-free returns.
3. Pension Contributions
While not a savings account, contributing to a pension fund allows your investments to grow tax-free until retirement.
Common Tax Mistakes to Avoid
1. Overlooking Lump-Sum Payments
Many savers forget to account for lump-sum interest payments from fixed-rate bonds, which could exceed the PSA in a single year.
2. Ignoring Offshore Accounts
Interest earned from offshore savings accounts is taxable in the UK and must be declared, even if the funds remain abroad.
3. Assuming All Interest Is Tax-Free
Only ISA interest is entirely tax-free. Interest from other savings accounts counts toward your PSA and may be taxable.
What Happens If You Don’t Declare Taxable Interest?
Failing to declare taxable interest can result in penalties and fines:
- Backdated Tax Bills: HMRC can demand payment for unpaid taxes from previous years.
- Penalties: Significant penalties may apply for underreporting taxable amounts.
- Interest on Unpaid Tax: Additional charges may accrue if tax payments are delayed.
Conclusion
The HMRC warning on savings accounts serves as a timely reminder for UK savers to stay informed about the tax rules governing their interest earnings. As interest rates rise, managing your savings effectively and understanding the implications of the Personal Savings Allowance (PSA) is more important than ever.
By tracking your interest, exploring tax-free savings options, and complying with HMRC’s rules, you can maximize your savings while avoiding tax penalties. Stay proactive, and make informed decisions to protect your financial future.
FAQs About the HMRC Savings Account Warning
1. What is the Personal Savings Allowance (PSA)?
The PSA allows basic-rate taxpayers to earn up to £1,000 of interest tax-free, while higher-rate taxpayers can earn up to £500 tax-free.
2. Do ISAs count toward the PSA?
No, interest earned in ISAs is tax-free and does not count toward the PSA.
3. How do I declare taxable interest to HMRC?
You can declare taxable interest through a Self-Assessment Tax Return or the HMRC online reporting system.
4. What happens if I exceed my PSA?
Any interest earned above the PSA is taxable at your income tax rate (20%, 40%, or 45%).
5. How can I avoid exceeding my PSA?
Consider using ISAs, premium bonds, or other tax-free savings options to reduce your taxable interest.
