Do I Need to Notify HMRC of Savings Interest?

In the UK, most people can earn some interest from their savings without having to pay tax on it. There are several allowances that can be used to earn interest tax-free.

By understanding and utilizing certain allowances, you can manage your savings efficiently and ensure that you maximize the tax-free interest you earn each tax year.

There are several allowances that can be used to earn interest tax free and each of these allowances is applicable every tax year, which runs from 6 April to 5 April the following year. Here's a detailed explanation of each allowance:

Personal Allowance

Definition: The Personal Allowance is the amount of income you can earn each tax year without paying tax. For most people, the standard Personal Allowance is £12,570.
Application: If you haven't used up your Personal Allowance on other income (such as wages or pensions), you can use it to earn interest tax-free.

Starting Rate for Savings

Eligibility: You may get up to £5,000 of interest tax-free if your other income (like wages or pension) is less than £17,570.
Calculation:

If your other income is less than £12,570, you could qualify for the full £5,000 starting rate for savings.
For every £1 of other income above your Personal Allowance (£12,570), your starting rate for savings is reduced by £1.
Example:

If you earn £16,000 in wages and £200 in interest:

Your Personal Allowance of £12,570 covers the first £12,570 of your wages.
The remaining £3,430 of your wages reduces your starting rate for savings by £3,430 (£16,000 - £12,570).
Therefore, your starting rate for savings is £1,570 (£5,000 - £3,430).
You don't have to pay tax on your £200 savings interest since it's within the £1,570 starting rate for savings.

Personal Savings Allowance

Allowance Amount: The amount of interest you can earn tax-free depends on your Income Tax band:

Basic Rate Taxpayers (20%): £1,000
Higher Rate Taxpayers (40%): £500
Additional Rate Taxpayers (45%): £0

Application: This allowance applies to interest from various sources such as:

Bank and building society accounts
Savings and credit union accounts
Unit trusts, investment trusts, and open-ended investment companies
Peer-to-peer lending
Trust funds
Payment protection insurance (PPI)
Government or company bonds
Life annuity payments
Some life insurance contracts

Non-Applicability: Interest from tax-free accounts like ISAs and some National Savings and Investments accounts does not count towards this allowance.

Tax Implications for Joint Accounts

Interest Division: If you have a joint account, the interest is usually split equally between the account holders. Contact the savings helpline if the split should be different.

Over Your Allowance

Tax Payment: If your interest exceeds your allowances, you'll pay tax at your usual rate of Income Tax. HMRC will adjust your tax code to collect the tax automatically or you can report it in your Self Assessment tax return.
Reclaiming Overpaid Tax: If you've paid tax on savings interest below your allowance, you can reclaim it within 4 years of the end of the relevant tax year using a Self Assessment tax return or form R40.

Registration for Self Assessment

When Required: If your income from savings and investments is over £10,000, you need to register for Self Assessment. Check with HMRC if you're unsure.

Need to File your Self Assessment?

Our team of tax specialists are here to help you every step of the way, from registering for self assessment to submitting your tax return. We offer fixed priced accountancy services and handle all of your self assessment filing responsibilities leaving you stress free and up to date.

Whether you have income acting as a sole trader or are looking to start a business, give us a call today for a free non obligated consultation to see how we can assist you.

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