Savers ride the tax tide due to rising rates

A freedom of information request obtained by investment platform, AJ Bell showed that up to 2.7 million people will need to pay tax on savings income in 2023/24.

It represents an increase of one million people compared with the number expected to pay tax on savings income in the previous tax year. It also includes 1.4 million basic rate taxpayers. 

As rates have risen, our members have expressed concerns to us that unrepresented individuals may not realise they have a tax liability. 

Background 

While the following will be familiar to most AccountingWEB readers, anyone outside of tax might find a potted history helpful to set the scene. 

Up until April 2016, banks and building societies paid interest after deduction of basic rate tax. For every £100 of interest earned, the saver was credited with £80 and the bank paid £20 to HMRC on their behalf. 

This worked well for basic rate taxpayers but was a hassle for both higher rate taxpayers and those on lower earnings. Higher rate taxpayers needed to contact HMRC to declare additional tax, while those with lower earnings, who didn’t need to pay the tax which had been deducted, had to recover what they had effectively overpaid. This meant either completing an R40 or registering with their bank or building society to receive their interest gross. Not every lower earner managed to do this, and several lost out.

From 6 April 2016, the government told the banks to stop deducting tax and gave us all a ‘personal savings allowance’ (PSA) instead. While technically a savings nil-rate band and not an allowance, it effectively allows people an amount of tax-free savings interest, with the amount dependent on their income. 

The allowance is £1,000 for those with a total income (including savings) of up to £50,270. It drops to £500 for higher rate taxpayers, and nil for additional rate taxpayers earning over £125,140 (2023/24 rates). This allows those on lower incomes to have more tax-free interest than those on higher incomes. 

The PSA is in addition to the starting rate for savings, which can benefit lower earners whose savings and other income are less than £17,570. 

What’s the problem?

When the policy was first introduced, it was estimated that around 95% of taxpayers would not have any tax to pay on their savings income. Interest rates were low, and people needed significant cash savings (on top of anything held in tax-free ISAs) to exceed the £1,000 or £500 threshold. 

Now that savings rates have increased to 5-6% in the top paying accounts, savings of £16,700-£20,000 could be enough to push a basic rate saver into tax in 2023/24. Those with larger savings may also have tripped the limits in 2022/23 when rates first started to rise. 

What should savers do? 

The major concern for most people in this position is whether they will need to complete a tax return. Reassuringly for them, HMRC’s current advice is basically, don’t worry, we’ll sort it. HMRC only asks those with substantial interest (over £10,000) to register for self assessment.  

Pre-population 

HMRC is able to identify any additional tax due based on information from banks and building societies. At the end of every tax year, these institutions report the interest they have paid out per account, including details of the individual’s name, address and (if known) NINO and date of birth. HMRC then completes a massive data matching exercise between July and October to link around 100 million accounts to the taxpayers on their records. 

As long as HMRC can match the details from the bank or building society to the right individual, they can use details of employment or pension income received through RTI to issue either a P800 to collect the tax through a future PAYE code, or a Simple Assessment. 

Where everything works, the bank sends the right details and that system of matching works, then the taxpayer shouldn’t have to do anything other than check HMRC’s figures. 

Our concern is what happens if that doesn’t go right and how then the guidance of do nothing and the law interact. 

Members tell us that P800s and Simple Assessments are not always accurate. Plus, unless HMRC issues a taxpayer with a Simple Assessment, strictly TMA 1970 requires an individual who is not already in self assessment to notify HMRC if they have a tax liability by 5 October following the end of the tax year in which it arose. This deadline does not sit comfortably with the issue of P800s and Simple Assessments between July and the end of October. 

That led us and the Low Incomes Tax Reform Group to contact HMRC for guidance, who came back to say that it was “relatively clear that the customer needs to advise HMRC of any untaxed interest in excess of £1000”. This is completely contradictory to the gov.uk guidance referenced above. 

So what now? 

I was recently asked to speak about this issue on BBC Radio 4’s Moneybox. When the BBC approached HMRC’s press office, they were adamant that the correct course of action was to wait for HMRC to resolve things. 

While we can appreciate that HMRC will not want contact from 2.7m people next year when, in theory, existing systems should sort things out, we do think it is important that people know what to do if they don’t hear from HMRC by the end of October when HMRC have usually finished their reconciliation run. 

For example, if someone has exceeded their savings allowance in 2022/23 and isn’t in self assessment, it would seem sensible at this stage to proactively report their interest details if they have not heard from HMRC. This can be done online via the Personal Tax Account, post, webchat or on the phone. 

Anyone in this position should be prepared to provide a full breakdown of their interest income from 6 April 2022 to 5 April 2023 on an account by account basis. This allows HMRC to cross check figures to those provided to the banks. Without this detail, there is a risk that interest figures self-reported by taxpayers might be added to figures supplied by banks and building societies, resulting in duplication.

While hopefully, the number of people who fall through the net will be small, to avoid longer term consequences if anything is missed, it is going to be important to encourage everyone to think a bit harder about their savings while interest rates are high