HMRC to contact 887,000 savers with over £3,500 in the bank | Personal Finance | Finance

Nearly 900,000 savers across the UK could soon receive unexpected letters from HMRC warning them of a looming tax bill on their savings interest. While savings themselves aren’t taxed, the interest they generate can be, especially now, as higher rates are pushing more people over the longstanding Personal Savings Allowance.

Currently, basic-rate taxpayers can earn up to £1,000 of interest tax-free each year, while higher-rate taxpayers are limited to £500. Additional-rate taxpayers get no allowance at all. The issue is especially acute for those using fixed-rate savings accounts, where money is locked away and interest is paid out in a lump sum at maturity. Because HMRC taxes interest in the year it becomes accessible, savers using multi-year deals may find that accumulated payouts push them into taxable territory.

In one scenario, a higher-rate taxpayer with just £3,500 in a three-year fixed-rate account paying 5% could exceed their allowance. Basic-rate taxpayers would face the same issue with around £7,000 in similar conditions.

Paragon Bank research shows 2.4 million fixed-term, non-ISA savings accounts will mature in the next three months, with 887,000 of those generating enough interest to trigger a tax liability.

Laura Suter, director of personal finance at AJ Bell, warned: “Many people won’t realise that [fixed rate accounts] could leave them with a tax headache in the future. You are taxed on the interest on your savings when it is accessible by you. So if you pick a fixed-rate savings account that pays out all the interest at maturity, for tax purposes all of that interest will be counted in one tax year.

“This means that the interest from just one account could take you over your Personal Savings Allowance on its own.”

To avoid being caught out, Ms Suter suggested opting for an account where the interest is paid out monthly or annually. She said: “This means it is spread across different tax years. Or you can opt for a fixed-term ISA savings account, where you won’t pay any tax on the interest.”

At present, Individual Savings Accounts (ISAs) allow UK savers to shelter up to £20,000 per year from tax.

Derek Sprawling, Paragon Bank’s Managing Director of Savings, noted: “Over half a million non-ISA fixed term accounts are maturing with sufficient interest to incur a tax bill for the holder and I would expect those savers to consider switching to an ISA variant if they don’t already utilise their annual tax-free allowance.”