HM Revenue and Customs (HMRC) is sending warning letters to thousands of savers who may owe tax on interest earned from bank accounts. Individuals with as little as £3,500 in fixed savings accounts could face unexpected tax demands, as HMRC automatically identifies interest income through bank data.
The tax authority is currently dispatching correspondence to those who underpaid tax in the 2025-2026 tax year, starting from June. HMRC will adjust tax codes to recover outstanding amounts. Banks share savings interest details with HMRC unless the funds are held in a Cash ISA, which remains tax-free.
Under the Personal Savings Allowance, basic-rate taxpayers earning below £50,270 can earn up to £1,000 in interest annually without paying tax. Higher-rate taxpayers earning between £50,271 and £125,140 have a reduced allowance of £500, while additional-rate taxpayers earning over £125,140 have no allowance.
For example, depositing £3,500 into a three-year fixed savings account at 5% interest would generate over £500 in interest, paid in full at the end of the term. If the saver earns £50,270 or more in that year, they would exceed the £500 allowance and owe tax. Higher-rate taxpayers pay 40% on interest above the allowance, so exceeding by £100 results in an extra £40 tax bill.
Even instant-access accounts can trigger tax liabilities. A saver earning below £50,270 with £21,000 in a 5% account would earn £1,050 in interest, exceeding the £1,000 allowance. HMRC will adjust tax codes for employed individuals and pensioners to collect the tax automatically.
