HMRC sending demand letters from at present as folks with £3,500 in financial savings issued warning
HMRC automatically detects savings interest from bank accounts and sends tax demand letters when earnings exceed Personal Savings Allowance thresholds of £500 to £1,000
The taxman is gearing up for another round of dispatching letters to individuals to adjust their tax code (stock)(Image: Getty Images)
Individuals with as little as £3,500 in fixed savings accounts could be hit with an unexpected tax bill from HM Revenue and Customs (HMRC) in the new tax year. This is because HMRC can automatically detect interest on savings generated by your bank account, and if you exceed a certain limit, you will automatically receive a notice of an additional tax bill.
With the tax year 2025-2026 officially ending today and a new tax year commencing just after midnight on Monday, April 6, the taxman is gearing up for another round of dispatching letters to individuals to adjust their tax codes to collect any underpaid tax. HMRC will start evaluating people’s final financial situations for the tax year ending today and will issue tax bills to those it determines owe tax on savings accounts in the upcoming months.
Such information is automatically reported to the taxman by your bank unless it falls within the deposit limit for a Cash ISA, which is shielded from tax.
The Personal Savings Allowance rules mean you can generate £1,000 per year in savings interest in your bank accounts without being taxed on it, but this only applies to people earning less than £50,270. If you happen to earn £50,271 or more, your Personal Savings Allowance is cut down to just £500. And if you earn £125,140, your Personal Savings Allowance drops to zero.
The exact amount you will owe depends on how much you earn, how much interest you received, and when it was paid out.
But you could be hit with a tax bill with as little as £3,500 in savings. For example, if you had deposited it into a fixed savings account for three years. In this situation, because the interest is all paid out in one lump sum on the date that the fixed account matures, the interest is counted in only one tax year, all at once.
If you deposit £3,500 into a fixed savings account at 5% for three years, you will generate more than £500 in interest. With fixed accounts, the interest is “crystallised” the moment it is paid out, and you receive all the interest in a single payment.
With just over £500 being paid out at once, combined with earnings of £50,270 or more that same year, you would exceed your £500 Personal Savings Allowance even without considering any interest from any other accounts you hold and can expect a letter from HMRC and a tax code change.
And if you are a higher-income earner, you forfeit 40% of every £1 over £500, not 20%. So even exceeding the Personal Savings Allowance by £100 would cost you £40 in additional tax.
If you had more money in savings, you could exceed the allowance even with a non-fixed, easy-access account in a single year. For instance, if you deposit £11,000 in a savings account for one year at 5%, you would generate £550 of interest, which would push you above the threshold and mean you owe tax to HMRC if you earn over £50,270. Even if you earned less than £50,270, should you have had savings of £21,000 at 5% for one year, you would generate £1,050 of interest and be liable to pay money to HMRC because you would surpass your £1,000 allowance.
There are, in fact, numerous different potential sources of income that count towards your Personal Savings Allowance.
According to the Government, the accounts affected are:
HMRC adds: “If you go over your allowance, you pay tax on any interest over your allowance at your usual rate of income tax.
“If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically.
“To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year.”
