1. Home
  2. Personal Finance Hub
  3. Are Your Savings Safe? Tax Trap to Catch an Extra One Million This Year
Published 19 February 2024
Reading Time
5 minutes

Are Your Savings Safe? Tax Trap to Catch an Extra One Million This Year

More people are expected to be caught by the savings tax trap this year. How do you report this income to HMRC – and how can you keep your savings tax-free?

Written By

With interest rates on some savings accounts sitting at highs not seen since 2008, over a million more people will have to pay tax on their savings income this tax year, according to an analysis of HMRC figures by investment platform AJ Bell.

But those people will have to face an element of the tax system that’s tricky to get to grips with, says Antonia Stokes, Technical Officer at the Low Incomes Tax Reform Group (LITRG), in an email to NerdWallet UK.

After hearing from people who are worried they might exceed their savings allowances and are unsure what they need to do to declare the interest they receive and pay what is due, Stokes believes that you should report your savings income to HMRC yourself.

Below we explain how to report savings income to HMRC proactively and we also reveal one of the top ways to put money aside tax free.

Will you breach your personal savings allowance?

“A basic-rate taxpayer can earn up to £1,000 in interest on savings without paying tax on it. This can be a nice bump – and many people won’t go over this £1,000 annual allowance,” said Brian Byrnes, Head of Personal Finance at Moneybox, in an email to NerdWallet.

However, it’s currently possible to get around a 5% interest rate with some of the best paying easy-access savings accounts. This means that someone could earn upwards of £1,000 in interest on their savings each year by holding more than £20,000 in such an account, which they would then need to pay tax on.

For those in higher tax bands, there are tighter limits on how much interest you can earn on savings without paying tax: 

Income tax band*Personal savings allowance
Basic rate £1,000
Higher rate £500
Additional or top rate £0

*For England, Wales and Northern Ireland. Scotland has different income tax bands. Scottish basic-rate taxpayers receive the £1,000 allowance up to the higher-rate threshold of £43,662.


Let’s look at how the personal allowance works in practice:

In some cases, you may not need to pay any tax on up to £5,000 of your savings income, but this only applies if your other earned income is less than £17,570 in the 2023-24 tax year. 

Could waiting for HMRC to take the tax be costly?

Whether you report your savings income or not, you’ll have to pay the tax due. HMRC can take this tax owed on savings income by adjusting your tax code. This is because banks are required to tell HMRC about the interest you earn.

However, Stokes believes that waiting for the banks and HMRC to act could be costly as taxpayers may receive penalties, including for:

“The law says that in some situations, [taxpayers are] responsible for telling HMRC that tax is owed. We therefore recommend that taxpayers contact HMRC to advise them of any savings interest and ask how any tax liability can be settled – ideally before 5 October following the end of the tax year,” she said.

5 October is the deadline for telling HMRC that you owe tax on a new source of income from the previous tax year.

How to report savings income to HMRC

In the month following the end of the tax year on 5 April 2024, you should get information from your bank about the interest earned, either in your usual statement or a separate interest statement. 

If you do have multiple accounts, wait until you receive information from all of them before contacting HMRC. And if you have a joint account, make sure you only include your share of the interest earned – it is usually split equally.

If you think you’ve gone over your personal savings allowance, you can ask HMRC about settling the tax owed by calling its Income Tax helpline, or by sending a letter. Have these details handy:

Top strategies for saving tax-free

Stokes believes that taxpayers should weigh up the best savings accounts for their circumstances. “If in doubt it can be a good idea to take advice from a financial advisor – though of course this comes at a cost,” she said.

That being said, two well-known options can give savers clear tax benefits.

  1. Use your ISA

Individual Savings Accounts (ISAs) remain one of the best ways to save tax-free, according to Brian Byrnes at Moneybox.

Each tax year you get a £20,000 allowance that you can split across different ISA products, including a Cash ISA, Stocks and Shares ISA and Lifetime ISA.

“Should your ISA then grow (as you would hope it should) via interest or growth of shares, you won’t be taxed on these gains,” said Byrnes. “However, if you don’t use it, you lose it, because your allowance doesn’t roll over into the next tax year.”

With the tax year ending on 5 April 2024, time is running out to look into how much of this year’s allowance you can use before losing it.

Byrnes does note that rates on cash ISAs are often slightly lower than non-ISA savings accounts, although they remain very competitive. 

“The key factor to consider however is that the interest earned in your ISA is tax-free, whereas non-ISA accounts are taxable. So it’s important to consider your after-tax return, not just the headline rate.”

  1. Use your pension

With many taxpayers eligible for at least 20% tax relief on their pension contributions, not paying into your pension is “like missing out on free money,” said Byrnes, adding that “Money you would have paid in tax goes towards your retirement instead.”

Pensions are for the longer term, and it’s likely you won’t be able to access your retirement fund until you’re at least 55. If you’re unsure about how to make the most of your pension, it’s best to seek financial advice.

Image source: Getty Images

Dive even deeper

NerdWallet UK Survey: Retirement and Emergency Funds are the Most Popular Savings Goals

NerdWallet UK Survey: Retirement and Emergency Funds are the Most Popular Savings Goals

New research by NerdWallet UK reveals that a majority of UK adults have clear savings goals and are taking action to reach them.

UK Lifestyle Debt Worries Statistics

UK Lifestyle Debt Worries Statistics

Almost a third of UK adults feel pressure to spend more than they can afford, using credit cards, loans or overdrafts. New research shows that debt worries still affect those earning above the average salary.

Childcare Funding is Changing This Year: Make Sure Your Family Doesn’t Miss Out

Childcare Funding is Changing This Year: Make Sure Your Family Doesn’t Miss Out

The government’s Childcare Choices scheme is expanding, so more families stand to benefit from 15 or 30 hours funded childcare. But accessing what you’re entitled to isn’t always straightforward. We explain how to claim what you’re eligible for.

Back To Top