HM Revenue and Customs (HMRC) has issued a warning to individuals with savings exceeding 3500 euros as the UK tax year approaches its end on April 5.
The alert comes as many Britons risk facing unexpected tax bills due to interest earned on their savings accounts. With HMRC’s advanced systems capable of automatically detecting interest income, there is no hiding place for those who exceeded their Personal Savings Allowance (PSA).
PSA allows basic rate taxpayers, earning less than 50,270 euros annually, to earn up to 1000 euros in tax-free interest each year. This allowance is significantly reduced to 500 euros for higher-rate taxpayers.
Those earning above 125140 euros do not receive any tax-free allowance for savings interest. Any interest earned beyond these thresholds will be taxed at the individual’s usual income tax rate, which could be 20%, 40%, or even 45%.
Impact on Higher Earners
Higher earners are particularly at risk. If they earn more than 500 euros in interest, they could lose 40% of every euro earned above this threshold. Fixed-term saving accounts often offer higher interest rates but may crystallize interest at the end of the term. They can push higher-rate taxpayers over their allowance, leading to significant tax liabilities.
Tax-Efficient Alternatives
Individuals seeking to minimize their tax burden can consider tax-efficient savings options. ISAs (Individual Saving Accounts) offer tax-free interest on savings up to an annual allowance of 20,000 euros, making them an attractive choice for those looking to avoid paying tax on their savings.
Additionally, National Savings and Investment (NS&I) products, such as premium bonds, do not affect the PSA, providing another tax-free avenue for savers.
Reporting Requirements
HMRC emphasizes the importance of reporting savings accurately. For those completing a self-assessment tax return, it is crucial to include all savings interest earned. If interest is earned in a joint account, it is typically split equally between account holders unless otherwise specified to HMRC.
Automatic Tax Collection
HMRC usually adjusts tax codes to collect any tax due on savings interest automatically. However, they individually must ensure they report their interest correctly, especially if they are self-assessing. Failure to do so could result in penalties.
Although servers are advised to review their accounts to understand potential tax liabilities. This includes checking interest certificates and ensuring all savings income is reported correctly. By taking proactive steps, individuals can avoid unexpected tax bills and make the most of their tax allowances.
HMRC’s warning highlights the need for savers to be aware of their tax obligations as the tax year concludes. By understanding the Personal Savings Allowance and exploring tax-efficient saving options, individuals can minimize their tax burden and ensure compliance with HMRC’s reporting requirements.
