The tax rate you pay depends on your situation
HMRC has clarified one of its tax rules(Image: Getty)
HMRC has issued guidance regarding a tax you may be required to pay. The update came after a query from a taxpayer who wanted to work out whether they were liable for a tax bill.
Writing on social media, the person asked whether their interest earnings from their current account in the 2024/2025 tax year would incur a tax liability. They asked: “I have not paid tax for them, am I in trouble?” They explained they had earned approximately £60 in interest over the year which they had not declared. They said they had only just realised this after reviewing their bank statement for the previous year.
HMRC said in response: “If you’re employed or receiving a pension, £60 interest for 2024.2025 is below the tax‐free savings allowance, so there’s no tax to pay and nothing you need to do. Banks report interest to us automatically.”
£1,000 allowance
They also pointed the taxpayer towards information on the Government website about tax on savings interest. People on the basic rate for income tax can earn up to £1,000 in interest each tax year without paying tax on this sum.
There is also a starter rate for savings of £5,000, which is reduced by £1 for every £1 you earn above the £12,570 personal allowance. This means once your income reaches £17,250 annually, you get no starter rate.
Those on the higher rate for income tax receive a £500 allowance while those on the additional rate receive zero allowance and pay tax on all their interest earnings. It’s worth noting that you can grow your savings completely tax-free through ISAs.
You can contribute up to £20,000 annually into cash ISAs and stocks and shares ISAs, splitting the allowance however you wish.
Tax rate increases
There are some major changes to be aware of taking effect from April 2027. From this date, the ISA allowance will effectively be reduced for cash ISAs, meaning you can only use up to £12,000 for cash deposits.
The remaining £8,000 allowance will need to be used for investment-based accounts. Another significant change from April 2027 is that the rate you pay on your taxable interest earnings is increasing.
All the rates are rising by two percentage points. This will push the rate for basic rate taxpayers from 20 per cent to 22 per cent and for higher rate taxpayers from 40 per cent to 42 per cent.
Those on the additional rate will see their rate climb from the current 45 per cent up to 47 per cent.
