Previously, HMRC told UK taxpayers that the agency would use personal interest information from banks and building societies to calculate taxable personal interest for the 2023–2024 tax year, then adjust individual tax codes or issue Simple Assessments.
While the aim was to avoid an influx of tax returns due to increased interest rates that year, HMRC has struggled to collect all of the income tax on personal interest for 2023–2024.
As a result, HMRC is issuing a warning to anyone who’s still relying on the tax agency to sort out their personal interest tax for them – reminding taxpayers that, ultimately, the responsibility for reporting interest income and paying any tax owed lies with the taxpayer.
The effects of frozen thresholds and inflation on personal interest tax
A common strategy used by the UK government to increase tax revenue is to freeze tax bands and allowances. As income increases with inflation, more people are brought into the tax system and existing taxpayers end up paying more tax, which is known as fiscal drag.
The Personal Savings Allowance (PSA) has stayed the same since it was introduced back in 2016, which allows people to earn the following amounts of interest income tax-free:
- £1,000 a year for basic rate taxpayers
- £500 a year for higher rate taxpayers
- £0 a year for additional rate taxpayers
Until 2022, if the Bank of England interest rate was below 1%, the PSA could cover interest on a five-figure deposit – meaning most savers wouldn’t owe any tax on their interest earnings.
However, rising inflation resulted in an average Bank of England rate of around 5% in the 2023–2024 tax year, meaning savers earned more interest while their PSA remained frozen.
Unfortunately for HMRC, the consequences of these conditions included such a significant volume of calculations that the agency didn’t finish issuing Simple Assessments until March 2025 – more than a month after the regular deadline for filing 2023–2024 tax returns online.
On top of this, HMRC has also been unable to match around 20% of the 130 million reports it received to the relevant taxpayer records. As a result, the tax agency is now instructing savers to check their interest income tax situation if they haven’t heard from HMRC.
Will the same problems apply to 2024–2025 interest tax collection?
The 2024–2025 tax year that ended recently also saw Bank of England rates reach as high as 5%, which means the same issues are likely to pop up again for savers and HMRC.
However, as the government is focusing on restricting cash ISAs after freezing the ISA allowance for another five years, it’s unlikely that PSA thresholds will be adjusted.
This could potentially make things even worse, so if you’re likely to be affected by a higher personal interest tax bill or already have been, then you should check in with HMRC urgently and take steps to ensure you’re reporting your income accurately and on time.
Here at gbac, we know that managing taxes can be a hassle, which is why our accountants in Barnsley offer tax consultancy services to support individuals and businesses.
So, if you need help with current or future tax planning or liaising with HMRC regarding previous tax years, you can call our team on 01226 298 298. If you prefer, you can send a query by email to info@gbac.co.uk and we’ll get back to you soon with more details.