Savers with £3,500 or more tucked away could be hit with an unexpected tax demand from His Majesty’s Revenue and Customs (HMRC). HMRC has the capability to automatically detect interest accrued in your bank account, and if your savings interest exceeds a certain limit, you’ll be issued a notice for additional tax.
The Personal Savings Allowance permits basic rate taxpayers to earn up to £1,000 in savings interest annually without paying tax on it, provided their income is below £50,270. However, for those earning £50,271 or more, this allowance drops to just £500.
With some fixed savings accounts offering rates as high as 5% or more, depositing £3,500 into such an account at 5% for three years would generate over £500 in interest. Interest in fixed accounts is “crystallised” when paid out, so after three years, the entire sum is released in one go.
This means that even slightly exceeding the £500 threshold could trigger a tax bill from HMRC, especially for higher earners who are taxed at 40% on any amount over the allowance, rather than the standard 20%. Going just £100 over could therefore result in a £40 tax charge.
There are several potential income sources that contribute towards your Personal Savings Allowance, reports the Express. The Government lists these as:
- Bank and building society accounts
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Savings and credit union accounts
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Unit trusts, investment trusts and open-ended investment companies
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Peer-to-peer lending
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Trust funds
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Payment protection insurance (PPI)
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Government or company bonds
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Life annuity payments
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Some life insurance contracts
HMRC further explains: “If you go over your allowance, you pay tax on any interest over your allowance at your usual rate of income tax. If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically.”
“To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year.”