I think I owe tax on savings interest: Do I have to tell HMRC?

• Savers will face tax bills on savings interest due to high interest rates
• Experts explain when you need to tell HMRC or if they will tell you

With interest rates on savings rising recently, I believe I owe the taxman a four figure sum for the last tax year.

I’ve read conflicting reports on whether to tell them or whether they’ll tell me. I have a nagging feeling that if I tell them, I might open a disturbing can of worms.

I don’t have to self-assess so I wouldn’t normally file a tax return. Any advice would be appreciated. Via e-mail.

This is Money’s Helen Kirrane replies: The Bank of England’s rate hikes over the past two years have been overall good news for savers.

Savings rates hit a 15-year high last September and savers jumped at the chance to get a 6.2 per cent annual fixed and a 5.2 per cent easy access account.

But it does mean that millions of savers will now owe tax on the interest their savings have generated, potentially for the first time.

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

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Anna Bowes, co-founder of Savings Champion answers: 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 get a £500 discount.

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

At the time the PSA was introduced, HMRC said 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 up before breaking the PSA has plummeted.

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 breach the PSA of £1,000 by depositing £52,357.

Today, the best one-year bond pays 5.21 per cent – ​​so a basic-rate taxpayer would breach the discount by only £19,194.

Similarly, the best easy access account available in April 2016 paid just 1.45 per cent – ​​so the PSA base rate would be broken on a deposit of around £69,000. With top rates now around 5 per cent, just £20,000 would earn £1,000 in interest.

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Of course, all of this figures assumes that you don’t own any other savings accounts, as the PSA applies to interest earned on all savings accounts, not the account.

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

Before the PSA, interest was paid after deducting the basic rate of tax, unless you were a non-taxpayer and completed an Inland Revenue form to prove this.

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

But as interest rates rise, many more people find themselves in violation of the PSA and therefore have to pay some tax.

The good news is that for those on the PAYE scheme, any tax due will be deducted through a change to your tax code.

However, this is estimated by HMRC based on old information provided by banks and building societies – the actual interest you earn over the coming year can be very different, especially if you’ve added or taken out a lot of cash since your last tax. year.

So it’s important to keep a close eye on your tax code and inform HMRC if things don’t look right.

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

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

If you do self-assessment regularly, you should add it.

If you’re not in work, on a pension or don’t complete a 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 have to pay tax and how to pay it.

However, if your income from savings or investments is more than £10,000, you must register for Self Assessment.

It appears that you are below the £10,000 threshold and don’t usually self-assess, so it will either be automatically taken from you via a change to your tax code or you will be contacted directly by HMRC.