Do rising interest rates mean more people have to do a tax return?

Savings Income: Should More People File Taxes (Stock Image)

Next year I will be 75.

I am concerned that investors who receive dividend income and/or interest from bank or savings accounts may not be aware that they are at increased (and increasing) risk of pay tax on this income if it exceeds the new (and decreasing) annual tax-free limits.

If they exceed these limits, are they required to complete a self-assessment tax return?

If so, I can foresee the ridiculous situation of even non-taxpayers having to file a tax return, even if their total income (including dividends and interest income) results in them still being a non-taxpayer.

Bank accounts that have paid zero or very low interest rates for years are now paying significant rates – so investors are going to keep a careful record of all their sources of such income.

Many investors have numerous accounts that may now be paying interest.


Steve Webb replies: The tax treatment of savings and dividend income is a complex matter, and you are right to say that a combination of reduced tax-free allowances and rising interest rates could easily lead more people to exceed these allowances.

The main features of the current system are as follows:

1. Most taxpayers have a standard tax-free personal deduction of £12,570 per annum, although this can be reduced for those with incomes over £100,000.

2. There are additional tax benefits and surcharges for interest income and dividend income.

– There is a ‘starting rate for savings’ (currently 0 percent) on the first tranche of interest income for people with a relatively low income; to be more precise, those who have other taxable income (e.g. wages, pension or property income) of less than £17,570 can have up to £5,000 a year in tax-free interest income; those who have less than £12,570 in other income can get the full £5,000 in savings income tax-free; for those earning between £12,570 and £17,570, the tax-free bracket is reduced by £1 for every £1 of other income above the tax threshold; there is an example of how this works at Tax on savings interest: how much tax you pay.

– In addition, there is a separate ‘personal savings deduction’, the amount of which depends on the income tax rate you pay; for base rate taxpayers the fee is currently £1,000 per annum, for higher rate taxpayers £500 and for supplementary rate taxpayers zero; those with savings income below these levels pay no tax on it.

– There is also a ‘dividend deduction’ that applies to dividend income (excluding shares held in an Isa that are already tax-exempt); when first introduced in 2016, the dividend payout was £5,000 per annum, but this was reduced to £2,000 in 2018 and to £1,000 at the start of the current financial year and will fall further to £500 next year; there are also special ones income tax rates applicable to dividends.

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Steve Webb, former Secretary of Pensions and pension columnist This is Money

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Find out if you may be affected and how to contact Steve here.

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Should taxpayers and non-taxpayers take action?

A combination of these different surcharges and nil rates – as well as the tax benefits for those who have savings and investments in Isas, whose returns are tax-free – should mean that most savers do not have to pay tax on their savings income.

However, you are absolutely correct in saying that those with larger amounts of savings and dividend income could face a tax bill, and this becomes more likely as the fees mentioned above are frozen or reduced as interest rates rise.

The question then arises how HMRC will collect tax on this savings income.

According to the website, HMRC will estimate your savings income in the current year based on what it was last year.

They then use this estimate to change (reduce) your tax code on any wage or retirement income. Through this route, they collect the tax due on your savings without further action on your part.

However, if you have not completed a tax return before, HMRC may not know how much savings income you have.

The website suggests that you should register for self-assessment “if your income from savings and investments is more than £10,000′.

HMRC also has a handy tool you can use to help you decide if you need to file a tax return or not.

This site contains the additional instruction that you must ‘tell HMRC’ if you had more than £2,000 in stock dividend.

It says that you do not have to complete a tax return for this, but can report this by calling HMRC or via the check your income tax place.

Finally, what you should pay attention to is that the personal allowance decreases if you go from a basic rate taxpayer to a higher-rate taxpayer (or from a higher-rate taxpayer to a supplementary-rate taxpayer).

With tax thresholds frozen for several years now, a routine increase in wages or pensions for someone who was previously just below the next tax bracket can put them in that bracket.

In addition to the extra tax due on the extra income, they could see their personal savings deduction reduced by £500, potentially resulting in a several hundred pound increase in the amount of savings tax due.

Ask Steve Webb a retirement question

Former Pensions Secretary Steve Webb is This Is Money’s Agony Uncle.

He’s ready to answer your questions whether you’re still saving, retiring or juggling your finances in retirement.

Steve left the Department of Work and Pensions following the May 2015 election. He is now a partner at actuary and consultancy firm Lane Clark & ​​Peacock.

If you would like to ask Steve a question about pensions, please email him at

Steve will do his best to answer your message in a future column, but he won’t be able to reply to everyone or correspond privately with readers. Nothing in his answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

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If Steve can’t answer your question, you can also contact MoneyHelper, a government-backed organization that provides free retirement assistance to the public. It can be found here and the number is 0800 011 3797.

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