If you have been using high yield savings accounts with interest rates often exceeding 5%, you might be facing tax on your savings this year, depending on the amount you’ve accumulated.
It’s projected that a significant number of individuals will encounter the obligation of paying tax on savings for the first time during this tax year.
The surge in interest rates is the main reason behind the increase in the number of savers who may find themselves subject to income tax on their savings.
In some instances a basic rate taxpayer with a savings pot of £16,667 could find themselves liable for tax on savings interest income.
A freedom of information inquiry conducted by the investment platform AJ Bell has revealed that HMRC forecasts over 2.73 million individuals will be required to pay income tax on their savings interest during the 2023/2024 tax year.
The predicted figure includes 1.37 million basic rate taxpayers, who are subject to a 20% income tax rate, marking a significant rise of approximately one million individuals from the previous 22/23 tax year.
Prepare for a tax bill on savings income from the 23/24 tax year
In prior tax years only holders of significant savings accounts earned enough interest to incur tax on savings interest.
Due to the recent rise in interest rates, a growing number of savers are now subject to tax on savings interest, with many unaware or unsure about the specific time when they will begin paying taxes on their savings interest.
You can earn interest on your savings tax free up to the limit of your personal savings allowance (PSA) which applies to all types of savings accounts except for ISAs, ensuring your earnings remain within the tax free savings threshold.
The maximum allowance for tax free interest, known as the interest tax free allowance, is £1,000 for individuals with a total income in the 23/24 tax year (including savings) of up to £50,270.
For higher rate taxpayers (40%), the personal savings allowance decreases to £500 and for additional rate taxpayers (45%) earning over £125,140, the allowance becomes zero.
In addition to the personal savings allowance, there is a starting rate for savings which can be beneficial for individuals with lower earnings whose savings and other income are below £17,570.
The starter rate for savings ensures that people with lower incomes can enjoy more tax free interest compared to those with higher incomes.
How do I pay HMRC tax on my savings interest
The method of paying tax on your savings can vary, particularly if you meet the criteria to submit a self assessment tax return which may be required for some savers.
Tax on interest PAYE:
If you are a pensioner or employed under PAYE, HMRC will adjust your tax code to automatically deduct the amount you owe.
To establish your tax code HMRC will evaluate your expected savings interest for the current year, using your previous year’s interest earnings as a basis.
Banks and building societies directly report savings interest details to HMRC, ensuring that HMRC uses accurate information to determine the appropriate tax code for you.
Tax on interest self assessment:
Individuals who file a self assessment tax return have the option to declare savings interest within their tax return.
Income tax due on savings interest is calculated during the self assessment process and is reflected on your SA tax calculation.
Check your 2024/2025 PAYE tax code
Always verify the accuracy of any changes to your tax code. If HMRC modifies your tax code due to savings interest, cross-reference the figures with your own savings account records.
Should a bank, building society, or HMRC error lead to an incorrect tax code, you may end up paying an incorrect amount of income tax, either too much or too little.
You can conduct HMRC tax code checks conveniently online through the HMRC app or by accessing your personal tax account.
Should you notice any discrepancies with your tax code HMRC can be contacted online or by phone to rectify the issue.
Claim overpaid tax back from savings
If you have already paid taxes on your earnings from savings you should request a refund for the tax paid on your interest if it falls below your allowance.
For those not completing a tax return the form R40 is the HMRC form you should complete and it’s crucial to remember that claims must be submitted within four tax years from the end of the relevant tax year.
The R40 form can be submitted to HMRC either online or by post, and processing tax refunds typically takes about six weeks for any overpaid tax to be repaid.
If you’re filing a self assessment tax return and have overpaid income tax on savings income any refund will be repaid through the self assessment system.
How to reduce tax on savings
For some savers who are paying income tax on savings for the first time it might be a good time to review other saving options that may be more tax efficient.
Two very low risk savings options include individual savings accounts (ISA’s) and NS&I premium bonds.
Using an ISA for some or all of your savings is one easy way to reduce your savings interest tax bill.
There is an annual ISA allowance which caps the amount you can invest at £20,000 per person per tax year.
Premium bonds are another tax free opportunity for savers with any winnings classed as non taxable income.
The maximum investment per person is £50,000 with each premium bond entered into a monthly prize draw with winning prizes drawn by a random number generator called ERNIE!
