HMRC Bank Account Savings Tax Warning for Exceeding £11,600

The HM Revenue and Customs (HMRC) has issued a critical warning for savers in the UK: those with bank balances of £11,600 or more could face unexpected tax liabilities due to interest accrued on their savings.

With rising interest rates making savings accounts more attractive, many individuals may not realise they’ve exceeded their tax-free allowance. Alice Haine, a personal finance analyst at Bestinvest, highlights the issue:
“The point at which a nest egg is liable for tax depends on the interest rate applied to the account – and also sometimes on how the tax is applied (monthly or annually). Savers with more attractive savings rates might find they become liable to a tax payment at a much lower level of savings than they had anticipated. And many savers don’t even realise they could be liable for tax at all.”

This blog will explore what this tax warning means, how it works, who is affected, and how to avoid or reduce your liability.

What Is the £11,600 Tax Threshold for Savings in the UK?

To understand the HMRC’s warning, it’s important to first grasp how the savings tax threshold works. The £11,600 figure represents an approximate savings balance where a higher-rate taxpayer would start paying tax on their savings interest, assuming an annual interest rate of 4.31%.

The savings tax threshold is dictated by the Personal Savings Allowance (PSA). Introduced in 2016, the PSA allows savers to earn a certain amount of interest tax-free, depending on their income tax band:

• Basic-rate taxpayers (20%): Can earn up to £1,000 in interest tax-free.
• Higher-rate taxpayers (40%): Can earn up to £500 in interest tax-free.
• Additional-rate taxpayers (45%): Do not receive any tax-free allowance on savings interest.

Why the £11,600 Figure?

At an interest rate of 4.31%, a higher-rate taxpayer’s £500 PSA would be exceeded once their savings balance reaches around £11,600.

Meanwhile, basic-rate taxpayers can save more – approximately £23,200 at the same rate – before surpassing their £1,000 allowance.

This means the amount of tax-free interest you can earn depends not just on your income level, but also on the interest rate offered by your bank.

With many savings accounts now offering rates of 4% or more, even modest savings balances could result in tax charges.

What Does Martin Lewis Say About Savings Tax?

Martin Lewis, the UK’s most trusted financial guru and founder of MoneySavingExpert.com, has always been at the forefront of guiding savers on how to make the most of their money.

Recently, he issued a crucial warning about the potential tax implications on savings interest, especially for those earning between £12,500 and £125,000 annually. As interest rates on savings accounts rise, more people may unknowingly breach the Personal Savings Allowance (PSA), resulting in tax liabilities.

In his latest update on X (formerly Twitter), Lewis shed light on the nuances of savings tax and how savers can navigate these waters legally and efficiently. Let’s break down his advice.

What Is Martin Lewis’s Key Message About Savings Tax?

Martin Lewis emphasises that taxes are not levied on the savings themselves but on the interest earned from those savings. This means that even if your savings balance is substantial, as long as the interest remains below your personal savings allowance, you won’t have to pay any tax.

However, with competitive savings rates now exceeding 4%, it’s becoming easier for savers to exceed these allowances, especially those in the higher tax brackets.

Martin highlights:
“So if you’ve got £20,000 or less in savings and you’re a basic-rate taxpayer, it is very unlikely that your savings interest would be taxed, so you don’t have to pay anything – you can get on with it.”

How Does the Personal Savings Allowance (PSA) Work?

Martin Lewis reiterates how the PSA impacts different income groups. The PSA defines how much interest you can earn tax-free, depending on your tax bracket.

He explained the implications in simple terms:
“If you’re a higher 40% rate taxpayer, which is someone earning over around £50,000 up to about £125,000, then your personal savings allowance is £500 a year. In a top easy access account, that means £10,000 in savings would incur the tax.”

For additional-rate taxpayers (earning over £125,000 annually), Martin points out:
“If you are a top-rate taxpayer, so earning over £125,000 a year, you do not get a personal savings allowance. So all of your savings interest is taxed.”

How Can Savers Stay Within the Allowance?

Martin Lewis offers practical advice for savers looking to stay within the PSA and reduce their tax liabilities:

1. Calculate Your Taxable Interest:

• If you’re unsure how much interest you’re earning, Martin reminds us that banks and financial institutions automatically report your savings interest to HMRC. For most people, this will be factored into their tax code.
• For those with higher savings interest, filing a self-assessment tax return may be necessary. He clarified:
  “If people end up taxed through the self-assessment system, they would simply put the total amount of interest that they earn in their tax return.”

2. Understand Automatic Tax Code Adjustments:

• Martin reassures lower earners that they often don’t need to worry about complex reporting:
  “If you don’t have a self-assessment return, which many people who are employed and in jobs and aren’t very high earners don’t have to do, well then, as long as you’re earning less than £10,000 of interest a year, you don’t really have to do anything.”

3. Leverage ISAs and Tax-Efficient Savings Accounts:

• To reduce or eliminate tax liabilities altogether, Martin advises investing in Individual Savings Accounts (ISAs) or Premium Bonds, where the interest earned is entirely tax-free. This is particularly beneficial for individuals who are close to or already exceeding their PSA.

Why Are Rising Interest Rates a Concern for Savers?

As savings accounts now offer competitive rates, sometimes exceeding 4% annual interest, many savers are at risk of breaching their PSA. For example:

• A basic-rate taxpayer with £25,000 in savings earning 4% interest annually would earn £1,000 in interest, which is the maximum allowable under their PSA.
• A higher-rate taxpayer with the same savings balance would earn £1,000 in interest but would exceed their £500 PSA, resulting in a tax charge on the remaining £500.

This means that even moderate savings balances could result in tax liabilities if placed in high-interest accounts.

What Happens If You Exceed the Personal Savings Allowance?

If your savings interest exceeds the PSA, you’ll need to pay tax on the surplus amount. Here’s how Martin Lewis explains it works:

1. Through PAYE (Pay As You Earn): If you’re employed or receiving a pension, HMRC will typically adjust your tax code to include the additional tax owed on your savings interest. This is done automatically using the information provided by your bank or financial institution.
2. Filing a Self-Assessment Tax Return: For those earning substantial interest or with complex financial situations, HMRC may require a self-assessment tax return. Here, you’ll need to declare the total amount of interest earned for the year.

Martin’s Advice for Higher Earners and Additional-Rate Taxpayers

Higher earners and additional-rate taxpayers are particularly at risk of incurring significant tax liabilities. Martin Lewis explains:
“If you’re a higher-rate taxpayer with savings over £10,000 in a top account, you’re likely to exceed your PSA, and for top-rate taxpayers earning over £125,000, no savings interest is tax-free at all.”

For these groups, Martin strongly advises:

• Prioritising ISAs: With interest earned on ISAs being tax-free, this is an excellent option for avoiding tax altogether.
• Exploring Premium Bonds: Although returns are not guaranteed, any winnings are tax-free.

How Does HMRC Monitor Savings Accounts and Interest?

If you think HMRC is unaware of your savings, think again. Banks and financial institutions are required to report all interest earned by account holders directly to HMRC.

This automated process allows HMRC to keep track of taxable savings income without requiring any manual declarations from most savers.

For example, if you have an account earning interest monthly, your bank will report these figures to HMRC, ensuring that any interest above the PSA is flagged. HMRC then takes steps to collect the tax due, either through your tax code or a self-assessment return.

Alice Haine explains:
“The point at which a nest egg is liable for tax depends on the interest rate applied to the account – and also sometimes on how the tax is applied (monthly or annually).”

Many savers are unaware of this system, which is why they can find themselves suddenly receiving a tax bill or warning from HMRC. Ignoring these warnings or failing to pay can lead to penalties and further complications.

Who Is Affected by the £11,600 Savings Tax Warning?

The tax warning applies to individuals whose savings balances generate interest exceeding their PSA. The groups most likely to be affected include:

1. Higher-Rate Taxpayers: With a £500 PSA, this group is the most vulnerable. Even moderate savings balances (e.g., £11,600 at 4.31%) can quickly breach the tax-free threshold.
2. Basic-Rate Taxpayers: While this group enjoys a larger PSA of £1,000, rising interest rates mean they, too, could exceed their allowance with balances as low as £23,200 at 4.31% interest.
3. Savers with High-Interest Accounts: Those holding accounts with competitive rates or promotional offers may find themselves breaching their allowance faster than anticipated.
4. Retirees and Pensioners: Older individuals who rely on savings for supplementary income may unknowingly exceed the limit, particularly if they hold multiple accounts.

The key takeaway? Even modest savings can trigger a tax liability if interest rates are high.

What Happens If Your Savings Interest Exceeds the Threshold?

If the interest earned on your savings exceeds the PSA, HMRC will collect tax on the excess amount. Here’s how the process works:

1. Through PAYE (Pay As You Earn): If you’re employed or receiving a pension, HMRC adjusts your tax code to account for the tax due on your savings interest. This means you pay the additional tax gradually through your income.
2. Via Self-Assessment: Individuals with significant savings income may be required to file a self-assessment tax return, declaring all interest earned above the PSA.

Failing to report your savings income or pay the tax owed can result in:

• Fines and Penalties: HMRC can impose penalties for non-compliance.
• Interest on Unpaid Tax: If the tax is not paid on time, interest charges may apply.

It’s crucial to monitor your savings and ensure you remain compliant to avoid these issues.

How Can You Check and Report Your Savings Interest?

To stay on top of your savings tax obligations, follow these steps:

1. Review Your Bank Statements: Most banks and financial institutions provide an annual summary of the interest earned on your accounts.
2. Use HMRC’s Online Tools: HMRC’s online personal tax account allows you to review your savings income and ensure your tax code reflects your situation.
3. Ask Your Bank: If you’re unsure about how much interest you’ve earned, contact your bank for clarification.

How Can You Reduce Your Tax Liability on Savings?

While tax on savings interest may seem unavoidable, there are steps you can take to reduce your liability:

1. Invest in ISAs (Individual Savings Accounts): Savings held in ISAs are tax-free, regardless of how much interest you earn.
2. Diversify Savings Across Accounts: By splitting your savings between multiple accounts, you can avoid exceeding the PSA for a single account.
3. Consider Premium Bonds: Returns on premium bonds are tax-free and can be a good alternative to traditional savings.
4. Seek Professional Advice: A financial advisor can provide tailored strategies to optimise your savings while minimising tax exposure.

Why Should UK Savers Stay Updated on HMRC Rules?

Tax rules and allowances, including the PSA, are subject to change annually. Remaining informed about these updates is critical for avoiding overpayment or unexpected liabilities. With interest rates on the rise, even modest savings can become taxable.

Alice Haine summarised the issue:
“Higher-rate taxpayers can hold up to around £11,600 in a savings account with a rate of 4.31% before they use up their £500 personal savings allowance and find themselves charged tax on the interest they earn.”

By staying proactive and informed, savers can avoid penalties, protect their income, and make the most of their financial planning.

FAQs About HMRC Bank Account Savings Tax Warning

What is the personal savings allowance, and how does it work?

The personal savings allowance is the amount of interest you can earn tax-free on your savings. It depends on your tax bracket: £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and none for additional-rate taxpayers.

Are savings in ISAs taxed by HMRC?

No, savings held in Individual Savings Accounts (ISAs) are completely tax-free, regardless of the interest earned or your tax bracket.

How do I know if I have overpaid tax on my savings?

You can review your tax payments using HMRC’s online tools. If you believe you’ve overpaid, you can request a refund by contacting HMRC directly.

Does HMRC automatically adjust for savings tax?

Yes, for most employed or pensioned individuals, HMRC adjusts the tax code to include savings tax. However, it’s your responsibility to check for accuracy.

Are joint savings accounts treated differently for tax purposes?

Yes, the interest earned on joint savings accounts is typically split equally between account holders, with each person taxed according to their PSA and income tax rate.

Can I appeal against an HMRC tax warning?

Yes, if you believe the warning is incorrect, you can contact HMRC with evidence of your savings interest to resolve the issue.

How often does HMRC review savings accounts?

HMRC reviews savings account interest annually based on reports from banks and financial institutions.