Savers with more than £3,500 tucked away could be in for a shock as HMRC might send them an unexpected tax bill. The tax authority can automatically detect interest accrued on savings in bank accounts and if it goes over a set limit, a notice of additional tax owed will be issued.
The Personal Savings Allowance lets basic-rate taxpayers earn up to £1,000 in savings interest each year tax-free. But this drops to £500 for those on incomes of £50,271 or more.
With fixed savings accounts now offering rates above 5%, stashing £3,500 in one for three years could see you earning upwards of £500 in interest. This interest is “crystallised” when paid out at the end of the term, meaning you get the entire amount in one go.
If your interest payout tops £500 – and that’s without even counting other accounts – expect a letter from HMRC. And for higher earners, every pound over the allowance sees 40% tax, not just 20%.
So, going over the Personal Savings Allowance by a mere £100 could mean a £40 tax hit. Remember, various income sources count towards your Personal Savings Allowance, as reported by reports Nottinghamshire Live.
The Government has identified several types of financial assets that are subject to tax on their returns, including savings and credit union accounts, unit trusts, investment trusts, open-ended investment companies, peer-to-peer lending, trust funds, payment protection insurance (PPI), government or company bonds, life annuity payments, and certain life insurance contracts. HMRC further explains the implications of exceeding your tax-free allowance, stating: “If you go over your allowance, you pay tax on any interest over your allowance at your usual rate of income tax.”
They add: “If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically.”
To determine your tax code, HMRC will estimate your interest earnings for the current year based on the previous year’s amount.