HMRC Warning on Savings Accounts Explained

HMRC warns UK savers about tax on interest earned. Learn about savings allowances, thresholds and how to avoid an unexpected tax bill.

As interest rates have risen in the UK, HMRC has issued a warning to savers who may now be earning more in interest than they realise. Many are unaware that they could face an unexpected tax bill if their interest earnings exceed the allowances available. With the tax year ending on 5 April, it's important to understand how savings interest is taxed and what action you may need to take.

Why Has HMRC Issued a Warning?

The warning follows a sharp rise in interest rates across savings accounts and fixed-term deposits. As a result, more individuals are now earning interest that pushes them over their Personal Savings Allowance (PSA).

In previous years, this wasn’t an issue for most people because interest rates were so low that few savers reached the thresholds. That has changed.

HMRC is reminding savers that banks and building societies report interest earned directly to them. If your interest income exceeds your allowance, you may need to pay tax on the surplus, even if you don’t file a tax return.

How Is Savings Interest Taxed?

Interest earned on non-ISA savings accounts is subject to income tax. The amount you can earn tax-free depends on your income level and tax band.

Here’s how it currently works:

  • Basic rate taxpayers (income up to £50,270): Can earn up to £1,000 in interest tax-free

  • Higher rate taxpayers (income £50,271 to £125,140): Can earn up to £500 in interest tax-free

  • Additional rate taxpayers (income above £125,140): No savings allowance – all interest is taxable

In addition, if your other income is below £17,570, you may be eligible for the starting rate for savings, which provides up to an extra £5,000 tax-free on savings interest.

Do ISAs Count Towards the Allowance?

No. Interest earned from Individual Savings Accounts (ISAs) is completely tax-free and does not count towards your Personal Savings Allowance.

This makes ISAs a useful way to protect savings from tax if you’re likely to exceed your PSA.

What Happens If You Go Over the Limit?

If your interest earnings exceed your PSA:

  • HMRC will be notified automatically by your bank or building society

  • You’ll either have the tax collected through an adjusted tax code, or

  • Be required to report the interest and pay via Self Assessment

You don’t need to do anything unless HMRC contacts you, but you should track your savings interest to avoid a surprise later.

How Can You Stay Within Your Tax-Free Limit?

To reduce or avoid tax on savings interest:

  • Make full use of your ISA allowance (£20,000 per year)

  • Monitor your total taxable income, including pensions and dividends

  • Spread your savings across tax-free and taxable accounts strategically

  • Use the starting savings rate if you qualify with low overall income

  • Be aware that fixed-term products paying annual interest could tip you over in a single tax year

Final Thoughts

The HMRC warning is a timely reminder that tax on savings isn’t just for the wealthy. With rising interest rates, even modest savers may exceed their tax-free allowances without realising. Stay informed, check how much interest your accounts are generating, and consider switching to tax-free savings options like ISAs if needed.

Being proactive now can help you avoid an unexpected bill or an unpleasant tax code adjustment later in the year.