Have greater than £10,000 in financial savings? Now Reeves threatens she’s coming for you with a monster tax invoice. Here’s tips on how to shield your self…

Savers could be in for a nasty surprise. HMRC is responsible for collecting what tax savers owe on the interest they have earned. 

But documents quietly released with the Chancellor’s Spring Statement last week reveal it has not been doing a great job. Savers have been let off the hook to the tune of hundreds of millions of pounds every year. As HMRC gets its house in order – and plays catch up – savers could face some ugly bills.

Here’s what’s happening – and what you can do now to protect yourself.

Documents quietly released with the Chancellor’s Spring Statement reveal HMRC has not been doing a good job of collecting what tax savers owe

What is going on?

A growing number of savers are attracting a tax bill on the interest they earn. Luckily, in most cases they don’t have to do anything to pay it – the money is taken automatically.

Banks and building societies tell HMRC what interest their savings customers have earned. HMRC then works out if any of them owe tax.

Where savers do owe money, HMRC claws it back through their pay packet. Savers who are paid through PAYE or get income from a pension have their tax code adjusted so they take home a little less every month until what they owe is paid off.

If you’re self-employed, you report any interest earned on savings on your self-assessment tax return. And if you’re not employed, do not get a pension and do not complete a tax return, HMRC should contact you and tell you if you need to pay tax and how to do it. At least that is how it should to work.

A consultation document from HMRC reveals that sometimes it has problems matching the data provided by banks and building societies with its own records. The issue is so bad it is unable to match up the data for around one in five bank accounts.

HMRC is now consulting on measures that would make it easier to align its records with savings providers. Once in force, savers who have earned interest that were previously unnoticed could face bills.

How much could this cost you?

Mark Levitt, partner at accountancy firm Blick Rothenberg warns where savers have not been billed correctly, HMRC can go back up to four years to determine the amount of interest owed.

It could also ask you to check your records. It has powers to claim back tax that you haven’t paid – even if it was through no fault of your own. ‘If you have already spent the money, it may be possible to agree a time to pay,’ he says. ‘Otherwise HMRC is likely to reduce your tax code, which will result in a lower take home pay from your salary.’

Why now?

For years, interest rates were so low that only the wealthiest savers breached their personal allowance, which allows you to earn a certain amount of interest tax free.

But as interest rates rise, even savers with relatively small nest eggs could breach their allowance. Older savers in particular, who rely on their savings for an income, risk running up tax bills.

Around 6.1 million savings accounts are now liable for tax – up from just 1.5 million in 2022 and 147,000 in 2021.

The personal allowance permits basic rate taxpayers to earn up to £1,000 in tax free interest, and higher rate taxpayers can earn £500. Additional rate taxpayers have no allowance. Once you exceed your allowance, you pay tax on interest at your income tax rate. Therefore, basic rate taxpayers pay 20 per cent, higher rate pay 40 per cent and additional rate pay 45 per cent tax.

With the best savings rates currently breaching 5 per cent, a basic rate taxpayer could face a bill if they have just £20,000 in savings. A higher rate taxpayer with just £10,000 could attract tax.

Mark Levitt, partner at accountancy firm Blick Rothenberg, warns that where savers have not been billed correctly, HMRC can go back up to four years to determine the amount of interest owed

What can you do?

If you do not exceed your personal savings allowance, you will have no tax to pay. If you do, use Isas rather than ordinary savings accounts as the interest you earn is automatically shielded from tax.

And if you’ve used up your £20,000 Isa allowance and your personal savings allowance now or in previous years, check you have paid the right amount of tax to avoid a surprise bill later. Your savings providers should issue you with a statement showing how much interest you have earned each tax year.

With multiple savings accounts, add these up to see whether you have breached your allowance. You can log on to your personal tax account to see if the total figure you have matches up with the one HMRC has for you.

If there is a discrepancy for the current tax year, it may be resolved automatically in time. That is because HMRC estimates how much interest you’ll get by looking at how much you got the previous year and adjusts once it receives the correct numbers.

‘You should start looking at your savings accounts to see what interest has been earned before HMRC catches up on you,’ adds Mr Levitt.

Any loopholes?

If you are on a low income, you may be able to earn up to £5,000 of interest without paying any tax.

This is called your starting rate for savings. Every £1 of income you earn from sources other than savings interest above your personal allowance (currently £12,570) reduces your starting rate for savings by £1. If your other income exceeds £17,570, you will have no starting rate for savings.