Savings interest for self-assessment – The impact of rising interest rates

Savings interest for self-assessment – The impact of rising interest rates

In the current climate of rising inflation rates, many savers are seeing significant returns on their savings and investments.

However, there is often confusion about how to report these earnings to HM Revenue & Customs (HMRC), particularly for earnings outside of an ISA or in addition to income reported via PAYE.

Understanding the tax implications for savings interest is key. It’s essential to know that while the principal amount in your savings isn’t taxed, the interest it generates might be taxable.

Generally, interest on savings is paid without tax deducted, known as receiving interest ‘gross’. In the UK, there’s a specific amount of interest you can earn each tax year tax-free. The tax year for which you’re liable for this interest is based on when you can access it, not when it was earned.

For joint accounts, the interest is typically considered split equally between holders for tax purposes. If your interest exceeds your tax-free allowance, HMRC usually adjusts your tax code for automatic tax collection.

However, if you’re completing a self-assessment tax return, you need to declare this interest yourself. The tax rate on savings interest depends on your usual income tax rate, which could be 0 per cent, 20 per cent, 40 per cent, or 45 per cent.

Taxable savings interest includes interest from banks, building societies, credit unions, investment companies, trusts, peer-to-peer lending, bonds, and certain annuity payments and life insurance contracts.

Your tax on savings interest is based on your total annual income, encompassing all income sources and any applicable reliefs or exemptions. There are different rates and allowances, depending on your income, so you may need to check these with one of our team.

Tax payments on savings and investments depend on individual circumstances. If employed or receiving a pension, HMRC usually adjusts your tax code for the extra tax due. For savings interest, this adjustment is typically automatic, but you must inform HMRC if you earn between £1,000 and £10,000 in dividend income. Earning over £10,000 from savings and investments requires a self-assessment tax return.

If you self-assess, report any savings or investment income in your regular tax return. If neither situation applies, HMRC will contact you regarding any owed tax on savings interest.

As the deadline for tax returns approaches, if you need to report savings income this year via Self-Assessment, please get in touch with us for assistance.