Martin Lewis has warned that many savers, particularly those nearing or in retirement, may be overpaying tax on their savings interest due to a common misunderstanding of the rules. The Money Saving Expert founder addressed the issue on his BBC podcast, explaining when interest becomes taxable.
Under current HMRC rules, savers have a starter rate for savings allowing up to £5,000 in interest tax-free, but this reduces by £1 for every £1 earned above the personal allowance of £12,570. Once earnings reach £17,570, the starter rate disappears. Basic rate taxpayers can also earn up to £1,000 in interest without tax, while higher rate taxpayers have a £500 allowance and additional rate taxpayers receive none.
Mr Lewis highlighted a key principle: interest is taxable at the moment it becomes accessible, not when it is paid. For instant access accounts, interest is taxable when paid. However, for fixed rate accounts where money is locked away, interest is only taxable when you can access it, even if it is added to the account earlier.
He gave an example of someone with a three-year fixed account paying interest monthly, opened before retirement. If the provider reports interest to HMRC when paid, the saver might be taxed at the higher 40% rate during the first year, even though they cannot access the interest until after retirement, when they are a basic rate 20% taxpayer. This could lead to overpayment.
Mr Lewis warned that many people may be in this niche circumstance, paying too much tax because interest is reported when paid rather than when accrued. He advised savers to check their accounts and tax codes, especially if they earn less than £10,000 in interest and do not file self-assessment, as HMRC automatically adjusts tax codes based on provider reports.
