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Savings rates are on the way down, but millions of people are still finding themselves hit with a tax bill on the interest their nest egg earns.
If you’re unsure exactly what is and isn’t taxable, when HMRC needs to know about your savings, and how the tax gets paid, here’s a clear guide to the rules.
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More than 2.6 million people will pay tax on their savings interest this tax year – a figure that has spiralled in recent years, according to a freedom of information request from investment platform AJ Bell. That includes 1.16 million people over state pension age. In 2022/23, only 493,000 pensioners were caught out.
Although interest rates have come down recently, they are still higher than they were in the years before the pandemic.
Higher interest rates are good news for savers, but the downside is they’re causing more people to go over the personal savings allowance – the amount of savings interest you can enjoy before tax becomes payable.
The PSA is £1,000 a year for basic-rate taxpayers and £500 for those that pay the higher rate. Additional-rate taxpayers do not have a PSA.
That means a basic-rate taxpayer earning 4% on their savings will start paying tax once their balance exceeds £25,000, while higher-rate taxpayers will hit the threshold at half that balance.
Some people on a lower income may be able to earn more savings interest before they pay tax, through the starting rate for savings.
The good news is that tax will only be payable on the amount over personal savings allowance and most people will not have to worry about reporting this income to HMRC. That’s because your bank, building society or NS&I will pass on details about interest paid on savings balances directly to HMRC.
Some people worry that they will need to do a tax return so that they can report their savings interest, but this isn’t the case for most. Alice Haine, personal finance analyst at the online investment platform Bestinvest, says: “For employees or pension recipients paying tax via PAYE, HMRC typically adjusts your tax code to collect tax on savings interest directly from your payslip. It does this by estimating your likely interest for the current financial year based on the previous year’s data.”
So any tax that’s payable will be deducted from your earnings or pension payments (not from your savings account). For the very small number of people who don’t pay any tax on their other income, but have large enough savings that they’re above the starting rate for savings, they will usually get a letter from HMRC asking them to pay the tax on their savings interest through the simple assessment process.
Although HMRC should get the information it needs automatically, it’s still a good idea for you to keep track. Anna Bowes, head of PR at The Private Office, says: “What’s important to remember is that it is your responsibility to make sure that you pay any tax due if your interest does exceed your PSA, so keep track of how much interest you are earning, whether you physically take it from your savings accounts or allow it to compound back into the account.”
Haine agrees: “While in theory this process runs smoothly with HMRC able to match the data it receives with your income records and update your tax code accordingly, it is always wise to monitor your own figures.”
There are some people who will need to declare savings interest to HMRC. These are
You can ask your bank or building society for an annual interest summary. If you access your account online you can usually find it there. If you have more than one account, add all of the amounts together and report the total.
“Most savings providers will give you an annual interest summary, usually available through online banking, or on request. The figure you need is the gross interest paid to you in the tax year, even if it’s only a small amount."
Adam French, head of news and communications at Moneyfacts, says that even though gathering this information might be fiddly or a chore, it’s important to treat this requirement seriously.
He adds: “Because HMRC increasingly gets interest information directly from providers, not declaring it could be picked up later, potentially resulting in an unexpected tax bill or penalty. Plus, penalties can be higher if HMRC thinks the omission was deliberate rather than an honest mistake.”
If you have a joint account, interest is split 50/50 unless you opt to declare a different beneficial ownership. You can contact HMRC to tell themif it should be split differently.
If you have over- or underpaid any tax, HMRC should send you a P800 letter by 31 March of the following tax year, that will explain any adjustments.
Haine says: “This allows HMRC to collect more tax from your payslip to cover anything you might owe. If you think you have breached your Personal Savings Allowance (PSA) and haven’t heard from HMRC by then, contact them directly. Staying proactive helps prevent errors and avoid any surprise penalties.”
The P800 will also let you know how to claim a tax refund – either online, via the app or you can request a cheque.
If you think you are entitled to a refund, but you haven’t heard from HMRC, you should complete an R40 form online. You’ll need evidence that shows your gross interest, tax deducted from interest and the net interest.
You can use this form to request a refund for overpayments going back four years.
One area where problems can occur is with fixed-term savings accounts.
Sarah Coles, head of personal finance at Hargreaves Lansdown, says: “The HMRC system isn’t perfect, because it reports savings interest when it is paid into the account. This works in most circumstances. However, if you have a fixed-term savings account, where the money is paid into the account monthly or annually, but can only be accessed at the end of a number of years, then the tax is only actually due at the end of the fixed period.
“This might not make a huge difference to you, but if you have timed the payout for a year when your income is lower and you’re in a lower tax bracket (such as after retirement), you could end up overpaying.”
It’s worth taking the time to understand how much interest your savings are earning and whether this is likely to be above your personal savings allowance, both now and in the future.
Interest rates are widely expected to drop further in 2026, which means that the number of people paying tax on savings will go back down.
But from April 2027, the rate of tax you pay on savings will go up to two percentage points higher than your rate of income tax. As a result, basic-rate taxpayers will need to pay 22%, higher-rate taxpayers 42% and additional rate taxpayers 47%. (Although Scotland has different income tax rates and thresholds, UK-wide rates and thresholds for tax on savings interest apply in Scotland).
If you are at risk of paying tax on savings, remember that any money you pay into ISAs grows tax-free and there will be no tax to pay when you make withdrawals either.
Currently you can pay up to £20,000 into ISAs each tax year. The amount that can be paid into cash ISAs will drop to £12,000 from April 2027, but the new rule won’t apply to savers age 65 or over.
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