I recently listened to the latest This is Money podcast and it raised a concern about the tax I owe on my non-Isa savings for the financial year ending in April 2023. I wanted to know if I should complete a tax return or if HMRC already has the necessary information to calculate my tax liability through their digital connection with my savings providers.
According to what I’ve read online, banks and building societies now have access to HMRC and they will automatically calculate the tax owed and adjust my tax code. However, some suggest that I still need to fill out a tax return.
As a former accountant, I understand that things have changed since I left the industry over a decade ago, including the tax-free savings allowance. So, I’m unsure of the best course of action.
If a person doesn’t usually complete a self-assessment tax return, they only need to start filing one if their income from savings and investments exceeds £10,000 per tax year. This information was shared by Ed Magnus of This is Money.
It’s worth noting that more than six million savers are expected to face tax bills on their interest for the first time in seven years. The personal savings allowance, which allows most savers to earn a certain amount of interest tax-free, has led to this situation. Basic-rate taxpayers have a £1,000 allowance, while higher-rate taxpayers have a £500 allowance. Additional-rate taxpayers don’t receive a personal savings allowance.
However, higher savings rates have caused many savers to exceed these thresholds. For instance, there are currently 10 savings providers offering interest rates of 6% or higher on one-year fixed rate savings accounts. This means that someone with a £16,700 pot as a basic-rate taxpayer, or just £8,350 as a higher-rate taxpayer, will exceed their annual allowance.
Fortunately, not everyone who owes tax on their savings will need to fill out a tax return. According to HMRC’s rules, individuals earning under £10,000 from savings and investments are exempt from completing a tax return. In cases where savers earn more than their personal savings allowance, but have less than £10,000 of income from savings and investments in a year, HMRC will calculate and collect the tax automatically.
However, those who already complete a self-assessment tax return, such as self-employed individuals, must report any interest earned from savings on their return. If someone is employed or receives a pension, HMRC will update their tax code automatically and deduct the tax from their earnings.
In order to determine a taxpayer’s tax code, HMRC estimates the amount of interest they will earn in the current year based on the previous year’s earnings. For individuals who are not employed, do not receive a pension, and do not complete a tax return, HMRC receives information directly from banks and building societies about the savings interest they receive. This information is used to inform individuals if they need to pay tax and provide instructions on how to do so.
I spoke with John McCaffery, head of tax and tax partner at Alexander & Co Chartered Accountants and Tax Advisors, and Neela Chauhan, a private client tax partner at UHY Hacker Young, to gain further insight into how HMRC calculates tax liability without a tax return. According to McCaffery, this is an area where taxpayers often feel confused and unexpected tax bills may arise. While HMRC should adjust a person’s tax code automatically if they are employed or receive a pension, discrepancies can occur. Changes in circumstances can result in incorrect tax codes and HMRC may request a significant amount of tax at short notice.
McCaffery also explained that individuals who earn more than £10,000 per tax year from savings and investments usually need to start filing a self-assessment tax return. It is important to report interest earned from these sources on the tax return. Additionally, individuals who own alternative investments should check if these have been included in their annual tax summary. If not, they should file a tax return.
Chauhan shared that many taxpayers are unaware of their obligation to pay tax on savings and investment income, and HMRC may benefit from educating them on this matter. Clear communication and a simplified process, such as making self-assessment applicable to anyone with a tax liability over their annual allowance, would be beneficial for all parties involved.
It’s also important to note that undeclared income in UK bank accounts is an area of concern for HMRC, especially with rising interest rates. HMRC receives data from banks and utilizes AI and machine learning technology to process it efficiently. They can send out thousands of nudge letters to taxpayers who have not filed accurate tax returns. Failure to pay tax on savings can lead to penalties, late payment interest, or even criminal investigations.
In conclusion, it’s crucial to understand your tax obligations on savings and investments. If HMRC has access to your savings information through banks and building societies, they may automatically calculate and collect the tax owed. However, if you already complete a self-assessment tax return or have income from savings and investments exceeding £10,000 per tax year, it’s necessary to report the interest on your tax return. It’s always recommended to seek professional advice to ensure accurate tax reporting and compliance with HMRC regulations.
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