When you’re choosing a savings account, there are several details to consider. For example, you’ll need to check how easily you can withdraw your savings and whether there are any limits on the amount you can pay in each year.
Yet, the amount of interest you’ll get on your savings is often the most significant deciding factor.
Luckily, as interest rates have increased over the past few years, you might find it easier to generate growth on your cash savings. However, this could also mean that you’re more likely to pay Income Tax on your interest and many savers don’t realise this.
If you’re unaware that you owe tax and fail to pay your bill, you could face penalties. Unfortunately, this situation could be increasingly common as more savers are triggering tax charges, and HMRC aren’t necessarily informing everybody.
Read on to learn more.
Research shows an additional 893,000 savers could pay tax on their interest by 2028/29
When you put wealth in a cash savings account, you typically generate interest over time. Depending on how much growth you achieve, you might pay Income Tax on interest from savings in a non-ISA account.
Fortunately, many earners have a Personal Savings Allowance (PSA) and any interest up to this threshold is tax-free. In 2025/26, the PSA is:
- £1,000 if you’re a basic-rate taxpayer
- £500 if you’re a higher-rate taxpayer
- £0 if you’re an additional-rate taxpayer.
You will pay Income Tax at your marginal rate on any wealth that exceeds the PSA and your Personal Allowance (£12,570 in 2025/26).
If you earn more than £100,000, your Personal Allowance will be reduced. You lose £1 of your Personal Allowance for every £2 that your earnings exceed £100,000. This could mean you pay more Income Tax.
In recent years, interest rates have increased, meaning you may generate more growth on your cash savings than you previously would have done.
Consequently, you could be more likely to exceed your PSA, if you have one, and so need to pay Income Tax on your cash savings interest, perhaps for the first time.
Indeed, the Association of Tax Technicians reports that an additional 893,000 savers could pay tax on their cash savings by 2028/29.
If you’re one of these individuals, it’s important to check that you’re aware of all your tax liabilities. While HMRC should inform you if you owe additional tax, this may not happen.
HMRC reports that 20% of bank accounts can’t be matched with a taxpayer account
Normally, HMRC would take information from banks and building societies to calculate whether you need to pay Income Tax on your cash savings interest.
HMRC will then adjust your tax code automatically if you’re employed and pay tax through Pay as You Earn (PAYE). Alternatively, if the tax can’t be collected through PAYE, HMRC may issue a “simple assessment” – a more straightforward alternative to a full self-assessment form.
However, HMRC systems are not currently operating as intended. The Association of Tax Technicians found that HMRC are receiving information from around 130 million bank accounts in the UK but acknowledged that 20% of accounts can’t be matched to a taxpayer.
Crucially, HMRC issued guidance explaining that it’s the responsibility of the taxpayer to report any unpaid tax if they haven’t received a letter informing them of an outstanding bill.
You could face fines of 5% plus additional interest if you fail to pay the correct amount of tax
You might assume that if HMRC haven’t contacted you about any additional tax liabilities then you are paying the correct amount of tax.
This isn’t necessarily the case and if you’re unaware that you owe tax on your cash savings interest, you might inadvertently underpay your tax bill.
HMRC may charge a 5% penalty on late Income Tax payments and apply interest until the remaining balance is paid. In some cases, if you don’t make an agreement with HMRC to pay what you owe, they might adjust your tax code for the following year.
Either way, if you accidentally miss a tax bill, you could end up paying more than you otherwise would have done.
We can help you understand your tax liabilities and find ways to reduce Income Tax on cash savings interest
Tax legislation can be difficult to understand, particularly as the rules often change. We can support you by explaining your various tax liabilities and ensuring that you understand changes to legislation.
This means you can be clear on whether you need to pay tax on your cash savings interest.
Further to this, we can give guidance on ways to mitigate the tax in the first place. For instance, if you save in a Cash ISA, there is no Income Tax to pay on interest you generate. In 2025/26, you can contribute up to £20,000 to your ISAs and we can help you make the most of this allowance before it resets at the start of a new tax year.
Also, if you’re earning a lot of taxable interest because you hold a significant portion of your wealth in a cash savings account, we can discuss alternatives with you.
In some cases, it might be more sensible to keep enough cash savings for an emergency fund or to save for short-term goals like a holiday and then invest any surplus wealth. This is because investing may help you generate more growth than cash savings, making it easier to reach important financial goals.
Get in touch
If you’re concerned about the tax you could pay on your cash savings interest, we can help you understand your position.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.
For specialist tax advice, please refer to an accountant or tax specialist.
Approved by the Openwork Partnership on 20/05/2024
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