What to do if you’ve gone over your Personal Savings Allowance.
The recent improvements to interest rates mean we can all make more cash on our savings. The only issue is for those with larger sums stashed away is that you may be liable to pay tax on some of those earnings.
If that happens to you, here’s what you need to do.
Will you pay tax on your savings interest?
Thanks to the Personal Savings Allowance, most people will be able to earn £1,000 or £500 in interest tax free every year, and that’s only on cash held outside an ISA or Premium Bonds. You’ll still get your tax free allowance, it’s just earnings above this which will be taxed. It’s all explained in more detail here.
If you don’t already fill in a self assessment form
This is the simplest option as you don’t need to do anything – at first at least.
As long as you are working (earning via PAYE – Pay As You Earn – which most people are) or receiving a pension and don’t already fill in a self assessment tax form, then HMRC will work out what tax you owe, if any.
There’s no need to let HMRC know what interest you earned as the banks will report all the non-ISA interest you’ve earned. They do this via a BBSI (Bank and Building Society Interest) return that includes how much interest you earned, even if it’s below the PSA levels.
As part of this BBSI return, the banks also share if it’s in a joint account. In this case this interest is split by the number of account holders, normally two.
And even though interest earned in an ISA is tax free, they’ll report this too. Where this could be relevant (and count towards your PSA) is if you’ve added too much to your ISA, taking you over the annual £20,000 allowance.
The banks need to do this by the end of June, though it can take longer for it to appear on your tax account.
Paying the tax you owe
The initial way you’ll pay any underpaid tax is through a change to your tax code. For most people this is currently 1257L. This shows that you can earn £12,570 every year tax free.
If it’s changed, it’ll effectively lower how much you earn tax free in a year, and you’ll pay a little extra every month through that tax year.
How to check your tax code?
You can see you tax code on your payslip, but you can also check it here via your Government Gateway account.
Confusingly it can take a while for this to happen and for you to pay that overdue tax. That’s because a tax year runs 6 April to 5 April, and as as mentioned, HMRC won’t know your interest earnings until late summer of the following tax year. Which means the payments will occur in the tax year after that. Here’s how it works:
- You earn interest in 2023/24
- It’s reported in summer 2024
- Your tax code is changed in autumn 2024
- You’ll pay the tax from April 2025 across all of 2025/26
You’ll be told about any tax code change when it happens (usually September or October), and if you want to instead make a one off payment you can contact HMRC for how to do this.
Where non self-reporting of interest earned could get annoying is HMRC will use the amount of interest earned in previous year to estimate the following year, and adjust tax code accordingly. More on this later.
If you fill in a self assessment form
Those who already fill in a tax self assessment form will need to manually input your combined interest earnings (along with any other additional income). You need to do this whether you’re over or under the Personal Savings Allowance.
Once the form is completed you’ll be told what tax you owe. You’ll have the choice as to whether it’s adjusted in your tax code or if you want to make a manual payment.
The deadline for filling in the form and making the payment each year is 31 January, though you can of course do this earlier.
How to find out what interest you’ve earned
When calculating how much you made, only the interest payments that you were able to access in that specific tax year count.
For example, if interest is applied to your account every month, and you can withdraw it without penalty, then all those payments will be part of the financial year you receive them.
But for an account which pays interest annually on a single day, such as a regular saver, all the interest would count towards that particular tax year. In the case of some longer fixed rate accounts, that could mean two or more years of interest all count in the year where that fixed term ended.
Remember you don’t need to include interest from ISAs or Premium Bonds.
One way to calculate your total interest earned is to simply go into your savings accounts and add them up. However, the more savings accounts you have, the more complicated it is. It also can be a pain if you’ve moved your money between different accounts, often because you’ve been chasing better rates.
Fortunately you’ll get an annual interest certificate from the bank detailing your total interest for the financial year. This is usually by the end of May, but it could be as late as June.
If you don’t get one, you can request one from the bank. Sometimes it’s possible to find it within your banking app.
If you earn more than £10,000 in interest in a year
The exception to the above is that those who earn more than £10,000 in interest and investments during a tax year will need to move on to the next step, and let HMRC know themselves via self assessment.
If you’ve already paid tax on your interest
It’s unlikely this has happened, but if you find it’s the case then you can reclaim it from HMRC using a R40 form (assuming you don’t already complete a self assessment form). It’ll take about six weeks to get your money back.
If you expect to earn less interest in future years
Frustratingly HMRC uses interest earned in one year to estimate what you’ll earn in the next, and adjusts your tax code accordingly.
This has a few problems. For one, fixed interest rates have likely peaked and are already down on their heights of mid-2023, with easy access accounts likely to follow when/if we see base rate cuts this year. So lower interest rates means lower earnings from savings accounts.
Another issue is if you’ve locked money away in a fix that only pays out when the account matures – not a bad thing to have done with recent high rates. That could mean you get drastically less in the intervening years
And of course, you may have decided to move some of your cash into ISAs or Premium Bonds where returns are tax free. Again, it means you won’t be earning potentially taxable interest next year if you’ve done this.
Well if this does happen to you, you’ll need to contact HMRC after a tax code is changed to update their estimate and change the tax code back.
How to contact HMRC about refunds or tax codes
By all reports, getting HMRC on the phone is probably harder than nabbing Glastonbury tickets. Still if you can get through it’s probably the quickest option. You can try on 0300 200 3300. You’ll need your National Insurance number ready.
If that does fail, you can write in with your query to:
Pay As You Earn and Self Assessment
HM Revenue and Customs