HMRC calculations might not be correct, especially on longer term fixes.
When my wife was issued her tax code for this financial year, her tax free allowance had been drastically reduced because HMRC claimed she had underpaid on interest earned on savings.
Though the letter didn’t break down the interest earned, the total they had recorded surpassed her Personal Savings Allowance (PSA). In fact, since savings interest counts as income, it actually pushed her in to the higher tax bracket, meaning 40% of the interest was owed to the taxman.
Now, technically that’s correct. Her savings accounts would have generated interest above the PSA. But in reality, HMRC’s calculation was wrong because she couldn’t access the money in that tax year.
Here’s more on what happened, what you need to watch out for, and how I managed to get HMRC to correct the error.
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How tax on interest works
Unless you hold money in a tax-free account such as an ISA or Premium Bonds, savings interest could be subject to tax.
You’ll only need to pay it if the amount earned takes you over some extra allowances:
- The Personal Allowance covers all income up to £12,571 each year. So if your earnings from work or elsewhere are below this, your interest could be covered
- The Starting Rate for Savings is up to £5,000 extra that can be added on the Personal Allowance, as long as your income is under £17,571
- Personal Savings Allowance is on top of these and set at £1,000 on interest for basic rate taxpayers and £500 for those on the higher rate
Once you go over these allowances you’re taxed on the remaining interest at your highest tax rate.
The earning period for interest runs from 6 April to 5 April the following year.
When you can access the interest makes a difference
What’s really important though is the HMRC rules state this is just interest that is accessible in that tax year.
So in an easy access account where you can take the money and any earned interest out at any time, it’s obviously subject to tax in that same financial year as it was paid.
Where it gets more complicated is when it comes to some regular and fixed rate bonds. How they pay and how they let you access the interest will vary by account.
Regular saver interest
With regular savers you might find the interest is paid every month, while others will pay it all at the end of set period, usually 12 months.
But to add to the complication, some regular savers will let you close the account early or make withdrawals through the year, while others restrict all access until it ends.
So if interest is paid monthly and you can access it, it’ll count towards that year’s tax calculation, just like with an easy access. Since that’ll likely cross two financial years (for example, if you opened it on 10 May 2025 a 12 month regular saver would end on 9 May 2026), it’d be part of two different years.
But if it’s paid all at the end, or if you can’t make any withdrawals, then it’ll count towards the year when that interest is added to the account.
Fixed rate bond interest
For fixed rate bonds, interest is usually either payable monthly, yearly or at maturity (when the bond ends). You might not get a choice.
Then there are two standard options for how interest is paid, though whether a bank offers both will vary.
If you decide to have it added to your account balance, and therefore compound, it’ll be kept in the fixed rate bond and you’ll only be able to access it once that fix ends, which could be anywhere from a couple of months to multiple years. It’ll be the end of that term when the total amount will count towards the tax calculation.
Alternatively, you can choose to have the interest ‘paid away’. Here all interest is added to a different account elsewhere. That’ll be easy access, so interest will be calculated in that same financial year.
Be careful of accounts that let you access the balance and interest if you pay an interest penalty. These will likely count as accessible.
Long fixes could lead to larger tax bills
It’s worth noting that the total amount of interest you receive on multiple year fixes could well take your total interest over your tax-free allowances.
For example, £20,000 at 4% for three years will earn £2,545 in interest if it’s all paid and accessible at maturity. That’s more than double the £1,000 PSA for basic rate taxpayers.
Of course, you might want to plan for this, especially if there’s a year where you’re going to be paying less tax than you do now.
For example, you might be an additional rate tax payer this year, but expect to be retired and earning less in a few years. Then there’s a chance some or all of the interest could be covered by the PSA and other allowances.
Why HMRC might get it wrong
There are a few reasons why you might be charged the wrong amount of tax on your savings interest by HMRC.
First up there’s simple human or computer error, for example interest has been double counted, so your assessed on £2,000 rather then £1,000.
You might also fall foul to HMRC using previous year’s interest earned as the basis on what to charge in subsequent financial years. That’s no good if your interest income suddenly drops down.
Then there’s where my wife was caught out. As I mentioned in the introduction, she was hit with a tax bill because HMRC had records showing she’d been credited interest in that financial year. That’s despite the interest being non-accessible until the bond matured in a later year, and therefore not due tax in that year.
But the reason HMRC included these totals in their calculation was because the banks reported it to them! Speaking to the banks in question, this is where the confusion can come in.
HMRC requires them to report interest earned (it’s all part of a big push to find tax dodgers and bring in as much tax income as they can), but it doesn’t make it clear what type of account it is. That means HMRC don’t know whether the customer can access the money. So you end up with some banks reporting it every year regardless, and others holding back.
How we corrected the tax bill
Our first point of call was the HMRC helpline. Though helpful, they told us we’d have to write to HMRC explaining the situation. We did manage to get them to tell us the banks and amounts they had used for their calculation (something missing from HMRC’s letter and online account).
To support our letter, I spoke to the two banks in question asking if they’d write us a supporting letter confirming that the interest wasn’t accessible. One bank (This Bank, formally known as JN Bank) was happy to do this.
The other (Hampshire Trust Bank), however, would only provide a statement showing the interest had been added to the account. So I had to track down the account terms and conditions and included the sections which showed there was no way to access the interest.
A month or so later, HMRC sent a new calculation and tax code. However, it had only removed one of the interest payments. So we called up the helpline once again, and this time they were able to sort it all out on the phone, removing the other interest payment and returning her tax code to the standard 1257L.
Self-assessment can prevent this
I had the exact same savings accounts as my wife, yet because I filled in a tax return myself and didn’t declare the interest, HMRC accepted the figures for my calculation. Doing this allows me to instead declare the interest when it is accessible. My wife will also be doing this from now on too.
Technically you only need to fill in a self-assessment form for things like earning any extra income as a sole trader, claiming pension tax relief, or having savings or investment returns above £10,000 a year.
However, others can too. And that might be a good idea if you’re worried about HMRC getting it wrong.
You’ll need to register for this by 5 October following the tax year in question. So for this year, that’s interest you have earned in 2025/26. You’ve then got until 31 January 2027 to complete the return.
Sadly it’s not the most simple form to complete, but if you’re just focussed on savings interest it should be manageable without outside help.
Beat the 2027 tax increase
From April 2027, there’s an extra 2% tax due on interest over the allowances. This means you’ll pay:
- basic rate taxpayers: 22% rather than 20%
- higher rate taxpayers: 42% rather than 40%
- additional rate taxpayers: 47% rather than 45%
This will apply to interest earned in the 27/28 and subsequent financial year, but not before. However, it’s likely if interest is paid and accessible as a whole after multiple years, it’ll all be taxed (after allowances) at the new higher rates.
