Savings interest could trigger HMRC penalties – Are you at risk?

Something as innocent as a mistake declaring interest earned on savings could land you in trouble with HMRC as part of a new crackdown. This is in part because rates of interest for savings accounts have increased, but also because many taxpayers do not know their tax free savings allowance.

This issue could affect tens of thousands of people and result in fines payable to HMRC. Our article explains what the rules are, why you could be at risk and how to avoid being caught out.

Tax free allowances for savings interest

The savings allowance varies according to your marginal rate of tax.

• Basic-rate taxpayers can earn interest of up to £1,000 tax-free per tax year;
• Higher-rate taxpayers can earn up to £500;
• Additional-rate taxpayers do not have any tax free allowance.

Currently, due to increased levels of savings interest payable by banks and building societies and the savings allowance having been frozen since 2016, some taxpayers may be at risk of fines.

This occurs due to the effects of ‘fiscal drag’, whereby frozen tax allowances combined with higher interest earnings drags taxpayers into higher tax bands automatically (and unwittingly).

Fiscal drag is happening in relation to all types of earnings and capital gains as a direct result of tax allowances and rate bands being frozen, alongside general inflationary effects. It means more people are expected to pay tax on their savings; recent estimates suggest that 893,000 more taxpayers will be paying tax on their savings by 2028-29. This income needs to be declared and tax paid through the self-assessment system.

You might be wondering how HMRC will know about your savings interest? Banks and building societies have a legal obligation to share information about their account holders with HMRC. They routinely provide data that verifies exactly how much interest people are earning from their savings; so if there is a discrepancy between what is declared and the actual amount earned, it will be scrutinised.

Some taxpayers will already have received a letter from HMRC – known as a ‘nudge letter’ – asking whether additional tax may be due. If you receive one of these please don’t ignore it; speak to a tax advisor to discuss how best to respond.

Not every taxpayer affected will receive a nudge letter. This is because HMRC is unable to directly match up every taxpayer with their bank accounts. Therefore, if you think you owe interest that is undeclared, you should contact HMRC to avoid the risk of greater penalties.

Failure to deal with the issue, whether you received a nudge letter or not, could incur a failure to notify penalty, late filing penalty, late payment penalty, and late payment interest. HMRC’s late payment interest rate is currently 8.25%.

Also bear in mind that when dealing with HMRC, the onus is always on the individual to ensure that they are paying the right amounts of tax and that they have taken adequate precautions to ensure they are informed about the rules.

If you have any concerns about your tax liabilities or would like expert advice on any tax matters, contact us via partners@rjp.co.uk.