HMRC warning to up to 5million people unaware they have a tax bill

Savers could be sleepwalking their way into a surprise tax bill with two in five thinking they don’t earn enough in interest to pay tax on their savings accounts, according to new research from Shawbrook. The research found that one in ten savers who have more than £20k+ in non-ISA savings accounts don’t believe they have enough in savings to worry about paying tax.

Assuming these savers were basic rate taxpayers, a 5% interest rate could put them over their Personal Savings Allowance. The Personal Savings Allowance (PSA) is what savers can earn in interest before having to potentially pay tax. The PSA hasn’t been changed since it was introduced in 2016, meaning that the basic rate taxpayers have an allowance of is £1,000. For higher rate taxpayers this decreases to £500, and for additional rate taxpayers £0.

The research found that one in five savers do not know how the tax on their savings is calculated whilst 17% have never declared their interest earned from their savings. This lack of understanding by savers could be costly. As interest rates remain high, many could, for the first time in their lives, earn over the PSA if they don’t take the steps to minimise this through tax-free savings accounts such as ISAs.

Adam Thrower, head of savings at Shawbrook said: “It’s shocking to know quite how many people could be sleepwalking into an avoidable tax bill by not paying attention to their savings. The Personal Savings Allowance has remained frozen since its inception, yet interest rates are much higher now compared to when this came into force, thus unaware savers could find themselves unnecessarily paying tax on their hard-earned savings.

"Declaring interest earned for tax purposes is something that most of us will be new to contend with. Recent data from CACI found that over 5million accounts are at risk of tax.

"The good news is that making use of ISAs is an easy way to reduce the tax burden. ISA accounts have a limit of £20,000 per tax year which for a couple means they could be saving up to £40,000 tax-free each year if they both open an ISA account. With the new tax year only just beginning, now is the time to start your year of savings right. Interest rates on ISAs remain high and there are accounts suited for everyone, from easy access to longer-term fixed-rate ISAs. However, the window of opportunity to secure a high-interest rate may be closing as we await the Bank of England’s expected base rate cut in the summer.”