I think I owe tax on my savings interest: Do I need to tell HMRC – or will it contact me?

With the rise in savings interest rates recently I now believe I owe the tax man a four figure sum for the last tax year. 

I’ve read conflicting reports on whether I should tell them or that they will tell me. I have an uneasy feeling that if I tell them I may be opening up a worrying can of worms.

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

Helen Kirrane of This is Money replies: The Bank of England’s base rate hikes over the last two years have, by and large, been good news for savers.

Last September, savings rates hit their highest level in 15 years and savers leapt at the chance to snap up a one-year fix paying 6.2 per cent and an easy-access account paying 5.2 per cent.

But it means that millions of savers will now owe tax on the interest their savings has built up, potentially for the first time ever.

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

Anna Bowes, co-founder of website Savings Champion replies: 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 for higher rate taxpayers they have a £500 allowance. 

Additional rate taxpayers don’t 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 increased, the amount you need to have in savings before the PSA is breached has fallen sharply.

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

Today, the best one-year bond is paying 5.21 per cent – so a basic rate taxpayer would breach the allowance with just £19,194.

Similarly, the best easy-access account available in April 2016 was paying just 1.45 per cent – so the basic rate PSA would have been breached with a deposit of around £69,000. With the top rates now paying around 5 per cent, just £20,000 would earn £1,000 in interest.

Of course, all these figures assume that no other savings accounts are owned, as the PSA applies to the interest earned on all savings accounts, not per account.

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

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

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

But, as the interest rates rise, many more people are finding themselves breaching the PSA and therefore be liable to pay some tax.

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

But, this will be estimated by HMRC, based on old information supplied by the banks and building societies – the actual interest you earn over the coming year may be very different, especially if you have added or removed large amounts of cash since the 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 in the PAYE system and you believe you have breached the PSA, you may need to do a self-assessment. The best advice would be to check with HMRC or with a tax specialist.

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

If you do a self assessment ordinarily, you should add it.

If you are not employed, do not get a pension or do not complete 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 pay it.

However, if your income from savings or investments is over £10,000 then you need to register for self assessment.

It sounds like you are under the £10,000 level and you don’t ordinarily complete a self assessment, so you will therefore either have it automatically taken via your tax code being changed or you will hear from HMRC direct.