Are you due a surprise tax bill on your savings?

Hundreds of thousands of savers could be at risk of a surprise tax bill this spring as HM Revenue & Customs (HMRC) delays sending out tax notifications.

Usually, HMRC sends out P800 letters – which inform taxpayers of overpayments and underpayments – by the end of November for the previous tax year. However, this year HMRC has extended the deadline to March, blaming a “higher than expected” volume of information about savings interest. 

This delay is particularly concerning for older savers, who tend to have larger savings balances and are more likely to exceed the Personal Savings Allowance (PSA) – the amount of interest you can earn on your savings, before you need to pay tax.

What’s on this page? 

• Why more savers are facing tax bills
• How HMRC collects tax on savings interest
• Who else might get a P800?
• How to avoid an unexpected tax bill

Why more savers are facing tax bills

Since 2016, interest paid on cash accounts has been tax-free up to £1,000 for basic-rate taxpayer, £500 for higher-rate taxpayers, and zero for additional rate taxpayers. But after more than 10 years at low levels, rates started to rise again from late 2022, peaking at 5.25% and remaining at that level from August 2023 to August 2024 – the highest rate in 15 years. That means that the 2023-24 tax year (which these letters relate to) saw the highest interest rates paid to savers since the PSA was introduced, so more people than ever before will have exceeded their PSA.

Anna Bowes, founder of SavingsChampion.co.uk, explains the impact: “The amount of tax now being raised from savers has soared as there is around £1.2 trillion in savings outside a cash ISA wrapper. In the 2022/23 tax year, HMRC raised £3.9 billion from cash savers, but the latest figures show this has escalated to over £10 billion.”

Recent figures obtained by Shawbrook Bank suggest that more than 5 million accounts exceeded the PSA threshold for the 2023-24 tax year, and that the figure will rise to 6 million for the 2024-25 year. (Those calculations came from monitoring platform CACI, which looked at data from contributing members of the monthly Current Account and Savings Database in October 2024.) Whilst some of those accounts will already have calculated and paid their tax through the self-assessment system, many others could be yet to receive letters. 

For example, £20,000 in a best buy account earning 5.5% interest would generate £1,100 in interest, exceeding the PSA for a basic-rate taxpayer. A higher rate taxpayer would only need to have £10,000 sitting in that same account to end up with a tax bill. (If you live in Scotland, the England and Wales higher rate threshold of £50,271 is the one that dictates your PSA.) 

This is particularly concerning for the over-50s, as research by Raisin shows that, on average this age group has savings worth £20,028. 

Laura Suter, director of personal finance at AJ Bell, warns: “Lots of people will be hit with, often unexpected, tax bills for their savings interest, as interest rates have risen and people hit their tax-free limit.”

How HMRC collects tax on savings interest

If you complete a self-assessment tax return, any tax owed on your savings interest is calculated as part of your annual tax return. However, for those who pay income tax through Pay-As-You-Earn (PAYE), HMRC collects tax on savings interest by adjusting your tax code.

Banks and building societies report interest earned to HMRC, and if you exceed your PSA, you would normally receive a P800 by the end of November. This letter informs you of any underpaid or overpaid tax, and HMRC adjusts your tax code for the following year accordingly.

Due to the delays this year, some people may not receive their P800 until March, leaving little time to prepare for any adjustments.

“It means people could be getting letters and have little or no time to prepare before the change kicks in,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. 

“This is a particular problem for those with larger savings balances. This includes people who have retired, because they’re recommended to keep emergency savings to cover one to three years’ worth of essential spending, which is enough to attract a serious chunk of interest.”

If you do receive a P800, make sure to check your tax code in the new tax year to ensure you aren’t paying more than you owe.

Who else might get a P800?

P800 letters aren’t just for savings interest; they can also correct tax underpayments or overpayments. If you pay tax through PAYE, HMRC calculates your liability based on information from employers, pension providers, and banks. Errors or changes in income can lead to unexpected adjustments.

You might receive a P800 if you have multiple income sources, such as a pension and part-time work, or if HMRC applied the wrong tax code. Those who changed jobs, retired, or received taxable state benefits may also be affected.

How to avoid an unexpected tax bill

While you can’t do anything about previous tax years, the best way to protect your savings from tax is by making use of tax-free accounts. Money held within an ISA is completely tax-exempt, meaning no matter how much interest is earned, no tax will be owed. We each get a £20,000 annual ISA allowance, so making the most of yours can help keep savings safe from HMRC.

For those who have already used up their ISA allowance, some National Savings & Investments (NS&I) accounts, such as Premium Bonds, also offer tax-free returns and won’t count towards the PSA.

Planning ahead is essential. With rising interest rates and delayed tax notifications, making full use of tax-free savings options can prevent unexpected tax bills and ensure your savings grow as efficiently as possible.