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With interest rates having risen significantly over the past couple of years, many savers are now earning more from their savings accounts than they have in previous years. However, a key tax change that some may not be aware of is that banks no longer deduct tax from interest at source. Instead, it's now the saver’s responsibility to ensure any tax owed is paid to HMRC.
This, combined with a reduction in the tax-free savings allowance for higher earners, means that more people than ever may now have a tax liability on their savings interest. If you have savings, it’s important to check whether you owe tax and understand how to pay it.
How Much Tax-Free Interest Can You Earn?
Most UK taxpayers benefit from a Personal Savings Allowance (PSA), which allows them to earn some interest tax-free. The allowance depends on your tax band:
Basic rate taxpayers (earning up to £50,270 per year) – can earn £1,000 in interest tax-free
Higher rate taxpayers (earning between £50,271 and £125,140 per year) – can earn £500 in interest tax-free
Additional rate taxpayers (earning over £125,140 per year) – do not receive any tax-free savings allowance
If your total interest earned in a tax year exceeds your PSA, the excess is taxable at your income tax rate:
Basic rate taxpayers: 20% tax
Higher rate taxpayers: 40% tax
Additional rate taxpayers: 45% tax
How Do You Pay Tax on Savings Interest?
Most people won’t need to complete a tax return to report their savings interest—HMRC usually collects any tax due automatically by adjusting your tax code. Here’s how it works:
1. Through Your Tax Code (PAYE System)
If you're employed or receive a pension, HMRC may adjust your tax code to collect the tax due on your savings interest automatically. They estimate how much interest you will earn based on past figures and adjust your tax code so that the extra tax is deducted from your salary or pension.
2. Through a Self-Assessment Tax Return
If you earn more than £10,000 in savings interest and dividends combined, or if you are self-employed, you may need to report your savings interest on a Self-Assessment tax return. If you already file a return, you’ll need to include your total interest earned for the tax year and calculate any tax due.
3. Paying HMRC Directly
If you are not in PAYE but owe tax on your savings interest, HMRC may send you a Simple Assessment (a letter showing how much tax you owe). You can pay this amount online, via bank transfer, or by cheque.
What Should You Do Now?
If you’ve earned interest on your savings, follow these steps:
✅ Check how much interest you’ve earned – Your bank or building society should provide an annual interest summary, or you can check online banking.
✅ Compare it to your Personal Savings Allowance – If your interest is below the allowance, no tax is due.
✅ Check your tax code – If you think HMRC has estimated your savings interest incorrectly, you can contact them to update it.
✅ Declare your savings interest if necessary – If you don’t pay tax through PAYE and owe tax on savings, you may need to report it through Self-Assessment.
Need Help?
If you’re unsure about whether you owe tax on your savings or need help with Self-Assessment, get in touch with us. We can help you ensure everything is reported correctly and that you aren’t paying more tax than necessary!
Charlotte Derbyshire FCCA
Director
Derbyshire accountants Ltd
01256 591 196
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