The tax rate you pay depends on your situation
HMRC has clarified one of its tax rules(Image: Getty)
HMRC has provided clarification about who needs to pay a tax. The department issued the guidance after a question from a taxpayer who wanted to understand their potential liability.
Writing on social media, the person asked whether interest earned from their current account during the 2024/2025 tax year would result in a tax bill. They asked: “I have not paid tax for them, am I in trouble?” They said they had accumulated some £60 in interest throughout the year which they had not declared. They explained they had only just noticed this after reviewing their bank statement from the previous year.
HMRC replied to set out the rules. The group said: “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.”
Online guidance
They also pointed the person towards guidance on the Government website regarding tax on savings interest. Basic rate income tax payers can earn up to £1,000 in interest annually without paying tax on this sum.
There’s also a starter rate for savings of £5,000, which decreases by £1 for every £1 you earn above the £12,570 personal allowance. Consequently, once your income hits £17,250 annually, the starter rate disappears entirely.
Higher rate income tax payers receive a £500 allowance, while additional rate payers get no allowance and are taxed on all interest earnings. It’s worth remembering that you can grow your savings completely tax-free through ISAs.
You can put in up to £20,000 annually into cash ISAs and stocks and shares ISAs, splitting the allowance however you see fit.
Key changes to savings tax
There are some significant changes to be aware of coming into effect from April 2027. From this point, the ISA allowance for cash ISAs will essentially be reduced, limiting cash deposits to £12,000.
The remaining £8,000 allowance must then be directed towards investment-based accounts. Another crucial change from April 2027 is that the rate paid on taxable interest earnings will rise.
All rates will increase by two percentage points. This will push the rate for basic rate taxpayers from 20 percent to 22 percent, and for higher rate taxpayers from 40 percent to 42 percent.
Those on the additional rate will see their rate climb from the current 45 percent up to 47 percent.
