Do I Have to Notify HMRC of Savings Interest in the UK?

Savings interest is a common way to grow your finances, but it’s essential to understand how it’s taxed in the UK. Many taxpayers wonder whether they need to inform HMRC about their savings interest, especially with allowances like the Personal Savings Allowance (PSA) in place.

This guide will provide a comprehensive understanding of when and how to notify HMRC, ensuring you remain compliant and optimally manage your savings.

What Are the Personal Savings Allowance (PSA)?

The Personal Savings Allowance (PSA) simplifies tax obligations for most individuals by allowing a portion of their savings interest to be tax-free. However, the amount you can earn tax-free depends on your tax band.

PSA Thresholds:

Tax Band	Tax-Free Savings Interest (PSA)
Basic Rate (20%)	£1,000
Higher Rate (40%)	£500
Additional Rate (45%)	£0

For example, a basic rate taxpayer earning £1,200 in savings interest would only need to pay tax on the £200 that exceeds their PSA. Conversely, an additional rate taxpayer pays tax on the entire £1,200 because they are not entitled to a PSA.

The PSA has streamlined the process for many, but it’s crucial to calculate your savings income accurately to avoid underpaying or overpaying tax.

Do I Have to Notify HMRC of Savings Interest?

If you complete a Self Assessment tax return, you must report any savings interest earned. Most savings interest falls within the Personal Savings Allowance, meaning basic-rate taxpayers can earn up to £1,000 tax-free, while higher-rate taxpayers have a £500 allowance.

However, if your income from savings and investments exceeds £10,000, you need to register for Self Assessment with HMRC. Interest earned from Individual Savings Accounts (ISAs) remains tax-free and does not need to be reported.

Ensure you monitor your savings income closely to avoid penalties for unreported taxable interest, and seek advice if your earnings exceed the threshold.

How Much You Pay Depends on Your Earnings?

Your tax-free allowance for savings interest depends on your total annual income, including wages, pensions, certain benefits, savings, investments, and applicable reliefs or exemptions. Let’s break it down by income bracket to clarify how these allowances and taxes work.

If You Earn Up to £17,570

For individuals earning £17,570 or less annually, you can combine your Personal Allowance, Starting Rate for Savings, and the Personal Savings Allowance (PSA) to maximise your tax-free interest.

How to Calculate Your Allowance?

Start with your Personal Allowance:

• £12,570 (standard)
• £13,830 (if claiming Marriage Allowance)
• £15,440 (if claiming Blind Person’s Allowance)

Add the Starting Rate for Savings Band:

• A maximum of £5,000 is added to your allowance for savings interest.

Include the PSA:

• £1,000 for basic rate taxpayers.

Subtract Non-Savings Income:

• Deduct any earnings from wages, pensions, or other taxable income.

Example 1:

A person earning £6,500 annually in salary:

• Total allowance: £12,570 (Personal Allowance) + £5,000 (Starting Rate for Savings) + £1,000 (PSA) = £18,570.
• Taxable savings interest: £18,570 – £6,500 (non-savings income) = £12,070 tax-free savings interest.

Example 2:

A person earning £14,500 annually in salary:

• Total allowance: £12,570 (Personal Allowance) + £5,000 (Starting Rate for Savings) + £1,000 (PSA) = £18,570.
• Taxable savings interest: £18,570 – £14,500 (non-savings income) = £4,070 tax-free savings interest.

After exceeding these allowances, any additional savings interest is taxed at the basic rate of 20%.

If You Earn Between £17,571 and £125,140

For individuals earning between £17,571 and £125,140 annually, the Starting Rate for Savings no longer applies, and you are left with only the Personal Savings Allowance (PSA).

Tax-Free Allowance for Savings Interest

Annual Earnings	Personal Savings Allowance (PSA)	Tax Rate on Excess Savings Interest
£17,571 to £50,270	£1,000	20% (basic rate)
£50,271 to £125,140	£500	40% (higher rate)

Key Considerations:

• Savings interest above your PSA will be taxed at the appropriate rate for your income band.
• For higher rate taxpayers, the PSA reduces to £500, limiting the amount of tax-free savings interest.

ExampleL:

An individual earning £45,000 annually:

• PSA: £1,000 tax-free savings interest
• Any savings interest above £1,000 is taxed at 20%

If You Earn Over £125,140

For individuals earning more than £125,140 annually, the situation changes significantly:

• The Personal Savings Allowance is completely removed.
• You will pay tax on all savings interest earned at the higher rate of 40% or the additional rate of 45%, depending on your income bracket.

Example:

• An individual earning £130,000 annually with £3,000 in savings interest:
  • Taxable savings interest: Entire £3,000.
  • Tax rate: 40%, resulting in a tax bill of £1,200.

How It Works: A Summary of Tax-Free Allowances

Each tax year, the following allowances apply to help reduce your tax liability on savings interest:

1. Personal Allowance: Covers your income from wages, pensions, or other sources, up to £12,570 (or higher if claiming additional allowances).
2. Starting Rate for Savings: Offers up to £5,000 in tax-free savings interest, reduced by £1 for every £1 earned over the Personal Allowance.
3. Personal Savings Allowance (PSA): Provides £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.

Important Notes:

• If your non-savings income exceeds the Personal Allowance, the Starting Rate for Savings reduces or disappears entirely.
• The PSA is the final layer of tax-free allowance for savings interest.

When Do You Need to Notify HMRC?

Not everyone needs to notify HMRC about savings interest, thanks to the introduction of the Personal Savings Allowance (PSA) and automatic reporting by financial institutions.

However, there are specific circumstances where notifying HMRC becomes essential. Below, we’ll explore these scenarios in detail to ensure clarity and compliance.

1. Savings Interest Exceeds the Personal Savings Allowance (PSA)

The PSA allows you to earn a certain amount of interest tax-free based on your tax band:

• Basic rate taxpayers (20%): £1,000 tax-free savings interest.
• Higher rate taxpayers (40%): £500 tax-free savings interest.
• Additional rate taxpayers (45%): No PSA; all savings interest is taxable.

If your total savings interest exceeds your PSA, you must notify HMRC about the amount that falls outside this allowance.

Example:

• A basic rate taxpayer earns £1,200 in savings interest. The first £1,000 is covered by the PSA, but the remaining £200 is taxable. This £200 must be declared to HMRC.

2. Untaxed Savings Interest

Although most banks and building societies report interest to HMRC and deduct tax automatically, there are instances where this might not happen:

• Accounts not subject to automatic deductions: Some savings accounts, such as fixed-term bonds, may not withhold tax at the source.
• Offshore or foreign accounts: If you earn interest from savings held in accounts outside the UK, this income is usually untaxed and must be declared.

It’s your responsibility to ensure that any untaxed interest is reported and that the correct amount of tax is paid.

3. Interest from Foreign Savings Accounts

Interest earned on foreign savings accounts is subject to UK tax laws if you are a UK resident for tax purposes. This applies even if the interest has already been taxed in the country where the account is held.

Key Points:

• Foreign interest must be converted into GBP for reporting purposes.
• Double taxation agreements may allow you to claim relief for tax paid abroad.
• Declare this income either through self-assessment or your personal tax account.

4. Interest from Joint Accounts

If you hold savings in a joint account, HMRC expects the interest to be split equally between account holders unless you have an agreement specifying otherwise. Each person’s share of the interest must be assessed against their individual PSA.

Example:

• A couple earns £1,800 in interest from a joint savings account. Each individual is responsible for £900, which may or may not exceed their PSA depending on their tax band.

5. When Your Income Affects Your Tax Band

If your total income, including savings interest, pushes you into a higher tax band, it affects your PSA and how much tax you owe. For instance:

• A basic rate taxpayer earning £45,000, including £1,200 in savings interest, would move into the higher rate band for part of their income. The PSA for higher rate taxpayers is £500, meaning £700 of the savings interest would be taxable.

This situation often requires careful calculation and notification to HMRC to ensure compliance.

6. Changes in Personal Circumstances

Certain life events or changes in financial circumstances might alter your tax obligations, requiring you to notify HMRC:

• Retirement: Transitioning to pension income can impact your tax band and PSA.
• Starting a business: Additional income may reduce your PSA or require self-assessment.
• Inheritance or windfalls: Large deposits earning substantial interest may exceed the PSA.

7. Savings Interest Not Covered by Automatic Adjustments

While HMRC often adjusts your tax code based on information provided by your bank, errors or omissions can occur. You should notify HMRC if:

• Your tax code does not reflect your actual savings interest.
• You have multiple accounts, and not all interest is accounted for.
• You suspect discrepancies in the information reported by financial institutions.

How to Calculate Taxable Savings Interest?

Understanding what counts as taxable interest is crucial for accurate reporting.

Types of Taxable Interest:

• Bank and Building Society Accounts: Includes regular and high-interest accounts.
• Fixed-Term Bonds: Earned interest, even if reinvested, is taxable.
• Investment Accounts (Outside ISAs): Any interest generated from these accounts must be declared.

Calculation Steps:

1. Identify All Sources of Interest: Review bank statements, bond returns, and other accounts.
2. Deduct Tax-Free Allowances: Subtract your PSA or any applicable starting rate for savings.
3. Report Any Excess: Use HMRC’s online services or file a self-assessment return for the taxable amount.

Example:

If a higher rate taxpayer earns £1,200 in interest, £500 is covered by their PSA. The remaining £700 is taxable, and they must notify HMRC.

What is the Role of Individual Savings Accounts (ISAs)?

Individual Savings Accounts (ISAs) are a powerful tool for tax-efficient saving. They provide a way to earn interest, dividends, and capital gains without paying tax.

Types of ISAs:

1. Cash ISAs: Ideal for risk-free savings with tax-free interest.
2. Stocks and Shares ISAs: Allows investments in the stock market with tax-free returns.
3. Lifetime ISAs: Designed for first-time home buyers and retirement savings.
4. Innovative Finance ISAs: Covers peer-to-peer lending and other investment options.

Each tax year, you can contribute up to £20,000 across all ISAs, helping you shield a significant portion of your savings and investments from taxation.

How to Notify HMRC?: A Step-by-Step Guide

Notifying HMRC about your savings interest is straightforward, whether you’re submitting a self-assessment tax return or using other methods. Here’s how to do it:

1. Determine If You Need to Notify HMRC

Before proceeding, check if your savings interest exceeds your Personal Savings Allowance (PSA) or if you have untaxed income, such as:

• Interest from savings accounts not held in the UK.
• Savings interest exceeding the PSA.
• Untaxed interest from bonds or investments.

2. Gather Your Financial Information

To accurately report your savings interest, ensure you have the following details:

• Annual Savings Interest: Check statements from banks, building societies, and other savings accounts.
• Tax-Free Interest: Separate any interest earned in ISAs, as it does not need reporting.
• Foreign Savings Interest: Include interest earned in overseas accounts.
• Relevant Documents: Such as annual statements or tax certificates from your bank.

3. Use HMRC’s Online Services

If your taxable savings interest exceeds the PSA, you can report it directly through your personal tax account on the HMRC website.

Steps:

1. Log in to your HMRC Personal Tax Account.
2. Go to the “Income” section and select “Savings and Investments.”
3. Enter the details of your taxable interest.
4. Submit your information for HMRC to update your tax records.

4. Complete a Self-Assessment Tax Return (if required)

If you have complex finances, high savings interest, or other taxable income, you may need to complete a self-assessment tax return.

Steps to File a Self-Assessment:

1. Register for self-assessment if you haven’t done so before (Register here).
2. Collect the necessary information, including your total savings interest.
3. Fill in the relevant sections of the tax return (e.g., SA100 form for individual income).
4. Submit your return online by 31 January or via post by 31 October.

5. Adjustments via PAYE (Pay As You Earn)

If you are employed or receive a pension, HMRC may adjust your tax code to collect tax on your savings interest.

How It Works:

• Banks report your savings interest to HMRC.
• HMRC calculates the tax owed and updates your tax code.
• Tax is collected automatically from your salary or pension.

6. Deadlines to Remember

• 31 October: Deadline for paper self-assessments.
• 31 January: Deadline for online self-assessments and payment of any tax owed.

7. Seek Professional Advice

If you are unsure about the process or have complex savings and investments, consider consulting a tax professional. They can help ensure compliance and optimise your tax savings.

What Are the Common Misconceptions About Savings Interest Tax?

Let’s debunk some myths about savings interest taxation:

1. Myth: “All savings interest must be reported.”

• Fact: Only interest exceeding your PSA or earned from non-UK accounts needs reporting.

2. Myth: “ISAs are taxable.”

• Fact: Interest, dividends, and gains within ISAs are completely tax-free.

3. Myth: “I don’t need to declare foreign interest.”

• Fact: All foreign income, including savings interest, must be reported if you are a UK resident.

What Are the Tips to Managing and Optimizing Taxes on Savings?

• Utilise ISAs: Ensure you maximise ISA contributions annually to avoid tax on interest.
• Plan With a Partner: If married or in a civil partnership, split savings to take advantage of both Personal Savings Allowances.
• Monitor Legislation Changes: Tax rules evolve, so staying informed about allowances and thresholds is critical.

Conclusion

Navigating savings interest and tax obligations need not be overwhelming. By understanding the Personal Savings Allowance, leveraging ISAs, and staying proactive with reporting, you can effectively manage your savings and avoid unexpected tax bills.

When in doubt, HMRC’s online tools or professional advice can provide clarity.

FAQs 

What happens if I don’t report savings interest exceeding the PSA?

Failing to report may lead to penalties and interest charges on unpaid taxes.

Do banks notify HMRC about savings interest?

Yes, most banks do, but verifying your tax records is your responsibility.

Is there a penalty for failing to declare taxable interest?

Yes, penalties can be imposed for late or inaccurate reporting.

Can I backdate declarations of savings interest?

Yes, you can amend tax returns for up to four previous tax years.

How is foreign savings interest treated?

Foreign interest is taxable and must be declared in the UK, even if no tax was deducted abroad.

What is the starting rate for savings?

If your total income is below £17,570, up to £5,000 of savings interest may be tax-free.

How do I know if I need a self-assessment?

You’ll need one if your taxable interest exceeds your PSA and isn’t taxed automatically.