By Clare Yates
5 min read
While HMRC collects most of the information it needs from banks and building societies, sometimes letters are sent to make sure savers check and understand their allowances.
These warning letters are becoming more common as savings rates rise, because higher interest means more people are crossing their tax-free allowances without realising it.
In this guide, we’ll explain what these letters are, why HMRC sends them, and what to do if one lands on your doormat.
Why does HMRC send tax warning letters?
HMRC sends savings account tax letters if it believes you may have earned more in savings interest than your allowances cover. The letters don’t accuse you of breaking the law, but they’re a nudge to check whether you owe any tax.
HMRC sends these letters out between June and March. The main reasons you might get one include:
Higher interest rates: Even with modest savings, the higher rates seen in recent years may push you over your allowances.
Multiple accounts: Interest from several banks and building societies adds up.
New savings habits: You may have opened bonds, regular savers or fixed accounts that pay all the interest in one go at the end of the term.
Outdated tax records: Savings interest missed in the past may have come to light in a tax review.
In many cases, the letter is simply HMRC encouraging you to review your situation and make sure the right amount of tax is being paid.
How does HMRC know about your savings?
Banks, building societies, and some investment providers report interest payments to HMRC each year. That means HMRC can see how much you’ve earned, even if tax isn’t deducted at source. If your figures suggest you’ve gone over your allowances, you might receive a warning letter.
This doesn’t necessarily mean you owe tax. Allowances like the Personal Allowance, starting rate for savings, and Personal Savings Allowance all affect how much tax-free interest you can earn. HMRC’s tax savings warning can sometimes just be a reminder to check whether those allowances cover you or not.
HMRC warns that savings over £3,501 may incur tax
You may have seen stories in the press saying “HRMC warning to UK savers about a potential tax bill on savings over £3,501.” Here’s why that figure in particular has been making the headlines.
If you’re a higher-rate taxpayer (40%), your Personal Savings Allowance is only £500. It doesn’t take a huge amount of savings interest to go over this threshold. For example, putting away around £3,500 in a fixed-term savings account could be enough.
That’s because fixed-rate accounts usually pay out all the interest in one lump sum at the end of the term, rather than spreading it across the years. So if you locked £3,500 into a three-year fix at 5%, you’d earn just over £500 in interest – but it would all be credited in a single tax year when the account matures.
That lump-sum payment alone would exhaust your £500 allowance in one go, and that’s before factoring in interest from other accounts. If you go over your limit, you’re likely to get an HMRC savings tax warning letter.
What should you do if you get a warning letter?
If you get an HMRC tax savings warning, the most important thing is not to panic. The letter is an opportunity to check your savings interest against your allowances and take action if needed. Here’s what you can do:
Log in to your personal tax account: Check the interest amounts HMRC has recorded under your name, via your personal tax account.
Check your interest totals: Check your savings accounts and add up all interest earned across them for the tax year.
Compare against allowances: Work out if your interest is covered by your Personal Allowance, Personal Savings Allowance or, if you are on a lower income, your starting rate for savings.
Update HMRC if necessary: If you have gone over your allowances, let HMRC know.
Keep records: Hang on to your bank statements or provider summaries, as these make calculations easier.
Plan for deductions: You may need to pay some tax, but it’s usually straightforward.
For information on how HMRC collects the tax you owe, read our guide to tax on savings interest.
How to avoid future letters
No one enjoys unexpected letters from HMRC, but a bit of planning can help:
Make use of ISAs: Interest in ISAs is always tax-free and doesn’t count towards your allowances. This is also the case for prizes on Premium Bonds.
Track your savings interest: Keep an eye on what you’re earning across all accounts.
Understand your allowances: Knowing how much you can earn tax-free helps you plan your savings better.
Update HMRC if your income changes: This helps keep your tax code accurate.
By keeping on top of your interest and allowances, you can reduce the chance of HMRC sending you another letter in future.
Getting an HMRC savings account tax letter can feel unsettling, but in reality, it’s a prompt to make sure everything adds up. Most people will still find their savings interest is tax-free, but if you do owe anything, sorting it is usually quick and simple.