Home Money I think I owe tax on the interest on my savings – do I need to tell HMRC or will they contact me?

I think I owe tax on the interest on my savings – do I need to tell HMRC or will they contact me?

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Under the ax: Many savers will face paying taxes on the interest on their savings for the first time due to high savings rates.

With the recent rise in savings interest rates, I now believe I owe the taxman a four-figure sum for the last tax year.

I’ve read conflicting reports about whether I should tell them or if they will tell me. I have the uncomfortable feeling that if I tell you, I may be opening a worrying can of worms.

I’m not required to do a self-assessment, so I wouldn’t normally do a tax return. Any advice would be appreciated. Via email.

Under the ax: Many savers will face paying taxes on the interest on their savings for the first time due to high savings rates.

Helen Kirrane from This is Money responds: The Bank of England’s base rate increases over the last two years have generally been good news for savers.

Last September, savings rates hit their highest level in 15 years and savers jumped at the chance to get a one-year solution paying 6.2 percent and an easy-access account paying 5.2 percent. hundred.

But it means millions of savers will now have to pay taxes on the interest their savings have accumulated, potentially for the first time in history.

This is because high interest rates on savings accounts will have caused many savers to default on their Personal Savings Allowance (PSA).

Anna Bowes, co-founder of the Savings Champion website, responds: The introduction of the PSA in April 2016 means that basic rate taxpayers pay no tax on the first £1,000 of interest earned each year, while higher rate taxpayers have a £500 allowance.

Additional rate taxpayers do not receive a PSA, so nothing has changed for them.

At the time the PSA was introduced, HMRC declared that around 85 per cent of savers would no longer pay tax on their savings.

But as interest rates have risen, the amount you need to have saved before you default on the PSA has fallen dramatically.

When the PSA was introduced, the best one-year fixed rate bond on the market paid 1.91 per cent, so a basic rate taxpayer would have defaulted on the £1,000 PSA with a deposit of £52,357.

Today, the best one-year bond pays 5.21 percent, so a basic rate taxpayer would miss the deduction by just £19,194.

Similarly, the best easy access account available in April 2016 paid just 1.45 per cent, so the PSA base rate would have been breached with a deposit of around £69,000. Now that higher rates Paying around 5 per cent, just £20,000 would generate £1,000 in interest.

Of course, all of these figures assume that you don’t own any other savings accounts, since the PSA applies to interest earned on all savings accounts, not per account.

When the PSA was introduced, the biggest change to our savings was the way interest was paid.

Before the PSA, interest was paid after deduction of basic rate tax, unless you were a non-taxpayer and completed an internal revenue form to confirm this.

However, from April 2016 this changed and all interest was paid tax-free, because most savers would no longer have to pay tax on the interest on their savings.

But as interest rates rise, many more people will find themselves defaulting on the PSA and will therefore be required to pay some tax.

The good news is that for those who are part of the PAYE scheme, any tax owed will be deducted through an amendment to your tax code.

But this will be estimated by HMRC, based on old information provided by banks and building societies – the actual interest you earn over the next year may be very different, especially if you have added or removed large amounts of cash since the last tax. year.

That’s why it’s important to keep a close eye on your tax code and let HMRC know if things aren’t going well.

If you are not on the PAYE system and believe you have breached the PSA, you may need to carry out a self-assessment. The best advice would be to consult HMRC or a tax specialist.

James Blower, founder of Savings Guru responds: The answer is, it depends! If you are employed or receiving a pension, HMRC will automatically update your tax code to collect any tax on savings interest.

If you normally do a self-assessment, you should add it.

If you are not employed, receiving a pension or do not complete the self-assessment, your bank or building society will tell HMRC how much interest you received at the end of the year. HMRC will tell you if you need to pay tax and how to do so.

However, if your income from savings or investments exceeds £10,000, you will need to register for a self-assessment.

It looks like you are below the £10,000 level and you don’t normally complete a self-assessment, so it will either be taken automatically through your tax code change or you will hear directly from HMRC.

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