I think I owe tax on my savings interest: should I tell HMRC, or will they contact me?

With the recent increase in savings interest rates, I now believe I owe the tax man a four-figure sum for the last tax year.

I have read conflicting messages about whether I should tell them or if they will tell me. I have an uneasy feeling that if I tell them I might open a disturbing can of worms.

I am not required to file a self-declaration, so I normally do not file a tax return. Any advice is appreciated. Via email.

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Helen Kirrane from This is Money replies: The Bank of England’s base rate increases over the past two years have generally been good news for savers.

Last September, savings rates hit a 15-year high and savers jumped at the chance to snag a one-year loan at 6.2 percent and an easy-access 5.2 percent account.

But it means millions of savers will now have to pay tax on the interest their savings have accrued, possibly for the first time ever.

This is because the high interest rates on savings accounts will have led to many savers exceeding their Personal Savings Allowance (PSA).

Anna Bowes, co-founder of website Savings Champion responds: The introduction of the PSA in April 2016 means that basic rate taxpayers will pay no tax on the first £1,000 of interest they earn each year, while for higher rate taxpayers they will have a £500 deduction.

Taxpayers with an additional rate will not receive a PSA, so nothing has changed for them.

When the PSA was introduced, HMRC stated that around 85 percent of savers would no longer pay tax on their savings.

But as interest rates have risen, the amount you need to have in savings before the PSA is violated has fallen sharply.

When the PSA was introduced, the best one-year fixed rate bond on the market paid 1.91 per cent, so a basic rate taxpayer would have breached the £1,000 PSA with a deposit of £52,357.

Today, the best one-year bond pays 5.21 percent — so a base-rate taxpayer would break the fee with just £19,194.

Similarly, the best easy access account available in April 2016 paid just 1.45 per cent – so the base rate PSA would have been breached with a deposit of around £69,000. With top rates paying around 5 per cent, just £20,000 would earn £1,000 in interest.

Of course, all of these figures assume no other savings accounts are owned, as the PSA applies to the interest earned on all savings accounts, not per account.

Savings interest is paid out tax-free

When the PSA was introduced, the biggest change to our savings was the way interest was paid.

Before the PSA, interest was paid after deducting basic tax unless you were a non-taxpayer and completed a tax form to confirm this.

However, this changed from April 2016 and all interest was paid out tax-free, because the majority of savers no longer had to pay tax on their savings interest.

But as interest rates rise, many more people find themselves violating the PSA and therefore having to pay taxes.

The good news is that for those on the PAYE scheme, any tax due will be collected through a change to your tax code.

But this is estimated by HMRC based on old information from the banks and building societies. The actual interest you earn next year could be very different, especially if you’ve added or removed large amounts of cash since the last tax. year.

So it’s important to keep a close eye on your tax code and notify HMRC if things don’t look right.

If you are not on the PAYE system and believe you have breached the PSA, you may need to undertake a self-assessment. The best advice is to contact HMRC or a tax specialist.

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The tax authorities are told…

James Blower, founder of Savings Guru responds: The answer is… it depends! If you are employed or receiving a pension, HMRC will automatically update your tax code to collect any tax on savings interest.

If you normally do a self-assessment, you should add this.

If you don’t have a job, don’t receive a pension or don’t complete the self-assessment, your bank or building society will tell HMRC how much interest you received at the end of the year.

HMRC will tell you if you need to pay tax and how to pay it.

However, if your income from savings or investments is more than €10,000, you will need to register for a self-assessment.

It sounds like you are below the £10,000 level and don’t normally do a self-assessment, so you will therefore either have this taken automatically via your tax code change or you will hear directly from HMRC.