Is your savings interest increasing your tax bill? What you need to know before 31 January

The 31st January Self-Assessment deadline is often associated with the self-employed, but this year, a different group of people is in HMRC’s sights: savers. If you held £12,500 or more in savings accounts during the tax year that ran from 6th April 2024 to 5th April 2025, you might be receiving a letter from the tax office. With interest rates finally offering meaningful returns, many savers are inadvertently breaching their tax-free limits for the first time in years.

Understanding the Personal Savings Allowance

To understand why HMRC is interested in your savings, look to the Personal Savings Allowance (PSA). When rates were at a historical low of 0.5%, a higher-rate taxpayer would have needed £100,000 in the bank to hit their £500 limit.

The PSA is a tax-free “buffer” for the interest you earn: basic-rate taxpayers have a £1,000 tax-free interest allowance, while higher-rate taxpayers receive £500. Additional-rate taxpayers receive no allowance at all. To put that into perspective: at a 4% interest rate, a higher-rate taxpayer hits their limit with just £12,500 in savings. A basic-rate taxpayer reaches their £1,000 limit with £25,000.

This means that a standard emergency fund – money you’ve likely already paid income tax on – can now generate enough “extra” income to trigger a new tax bill.

Once you cross your threshold, every pound of interest earned is taxed at your highest marginal rate.

What counts as savings interest?

It is a common misconception that this only applies to high-street savings accounts. HMRC’s definition of “interest” is broad. It includes interest from bank and building society accounts, credit unions, peer-to-peer lending, and interest distributions from unit trusts or investment trusts. Government and company bonds, as well as some life insurance contracts, also count toward your total.

While the money you hold in an ISA remains tax-free and does not count toward your PSA, almost everything else does. If your total interest across these sources exceeded your allowance for the tax year, you are legally required to report it. For many, this will mean completing a Self-Assessment return by the 31st January deadline to avoid penalties.

Protecting your savings

With the looming tax deadline, the pressure to file correctly increases. HMRC has warned that more than 4,800 scams have already been reported this year. Fraudsters often use the fear of a “missed deadline” or the promise of a “tax refund” to lure people into clicking suspicious links. HMRC will never ask for bank details via a text or email.

At Taxd, we help you with these calculations to ensure you aren’t paying more than necessary while keeping you firmly on the right side of the law.

The January 31st deadline is fast approaching. Ensure your 2024/25 tax return is filed correctly and your savings interest is fully accounted for. Use Taxd’s simple platform to stay compliant today. File Your Return Now