Taxpayers relying on HMRC to sort out the tax due on interest are given a warning.
Over the last few years, one of the strategies adopted by successive governments to increase tax revenue has been by the freezing of tax allowances and thresholds. As inflation increases income, the net result is generally to:
- bring more people into the tax system; and
- make existing taxpayers pay more tax, both in absolute terms and as a share of their income.
One frozen allowance increasingly causing problems is the personal savings allowance (PSA), which has been unchanged since its introduction in 2016:
- For basic rate taxpayers, the PSA is £1,000 per tax year, which means they have no tax to pay on their first £1,000 of interest income.
- For higher rate taxpayers, their tax-free interest under the PSA is £500.
- Additional rate taxpayers do not qualify for a PSA.
Until 2022, the Bank of England Bank Rate was below 1% which meant that the PSA covered interest on even substantial five-figure deposits, meaning most savers had no tax to pay on their interest earnings. However, the effects of rising inflation dramatically changed the picture with higher interest rates. In the 2023/24 tax year, Bank Rate averaged about 5%. As a result, savers earned much more interest to exceed their PSA limits.
As a result, HMRC is now struggling to collect all the income tax due on interest for 2023/24. To prevent a flood of tax returns, HMRC has previously told taxpayers that it would use the personal interest information sent directly by banks and building societies to calculate tax due on interest and then issue a Simple Assessment or adjust their tax code. However, due to the sheer volume of data for 2023/24, many assessments weren’t completed until March 2025. This was over a month after the normal online filing deadline for 2023/24 tax returns.
To make matters worse, HMRC was unable to match about one in five of the 130 million account reports it received to taxpayer records. HMRC is now reminding savers that the taxpayer is ultimately responsible for paying tax on interest received and that they should do so urgently if they have not heard from HMRC.
The problem is unlikely to disappear in the recently ended tax year, and with the current government considering tighter restrictions on cash ISAs, it’s unrealistic to expect Rachel Reeves to respond by increasing the PSA meaning savers could face even greater challenges ahead.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
30th May 2025
