HMRC Struggles to Keep Up with Tax on Interest
Taxpayers relying on HMRC to correctly calculate tax on interest are being warned: the system is under strain, and personal responsibility is key.
Over recent years, one government strategy to boost tax revenue has been to freeze tax allowances and bands. As inflation lifts income levels, this approach tends to:
- Pull more people into the tax system
- Increase the tax burden on current taxpayers
One frozen allowance creating more problems is the Personal Savings Allowance (PSA), which has remained unchanged since its introduction in 2016:
- Basic rate taxpayers: £1,000 of tax-free interest per year
- Higher rate taxpayers: £500
- Additional rate taxpayers: no PSA entitlement
Why this matters now
For years, low interest rates meant few savers exceeded their PSA. For example, when the Bank Rate was under 1%, the PSA covered interest from even five-figure savings balances.
But by the 2023/24 tax year, with Bank Rate averaging around 5%, many savers earned interest that exceeded their allowance — triggering unexpected tax liabilities.
HMRC’s delayed response
To ease the administrative burden, HMRC had planned to use information from banks and building societies to issue Simple Assessments or adjust tax codes.
However, the sheer volume of calculations for 2023/24 caused significant delays. Assessments were not sent until March 2025, over a month after the normal online tax return deadline.
Adding to the issue, HMRC could not match about 20% of the 130 million account reports to taxpayer records.
What taxpayers should do
Despite these delays, HMRC has reminded taxpayers that they are ultimately responsible for paying any tax on interest earned. For detailed information, refer to the HMRC guidance on tax on savings interest.
If you’ve not received a notice and earned taxable interest in 2023/24, act now. Report and pay your tax, or risk penalties.
Looking ahead
A similar backlog is likely for the recently ended tax year. But don’t expect any increase to the PSA. In fact, the current political focus on limiting cash ISAs could make matters worse for savers.