Tax check: shock bills hit UK savers as HMRC targets interest on Personal Savings Allowance for new tax year

• Unexpected tax bills are landing on savers with as little as £3,500 in the bank
• HMRC is cracking down on interest earned above tax-free limits, especially from fixed accounts
• Higher earners get a smaller Personal Savings Allowance — or none at all
• Fixed-term interest is often paid in one lump sum, pushing people over the threshold
• Cash ISAs remain tax-free, making them a safer option for savers looking to avoid surprise bills

If you think your savings are too small to worry the taxman, you could be in for a nasty surprise.

With the 2025/26 tax year now underway, HMRC has ramped up efforts to claw back unpaid tax on interest earned during the previous year.

That means that surprise tax bill letters have been landing on the doormats of people with even modest savings, in some cases as low as £3,500 — all thanks to the way interest on fixed savings accounts is taxed.

Your bank automatically reports your savings interest to HMRC (unless it’s in a Cash ISA), and if it goes over your tax-free allowance, you’ll be told to pay up — often without warning.

The Personal Savings Allowance (PSA) lets basic-rate taxpayers earn up to £1,000 in interest tax-free. But if you earn more than £50,270, your allowance halves to £500. Hit £125,000 and your allowance vanishes altogether.

With interest rates still relatively high, even small savings pots can tip you over the edge — especially if you’ve locked your money into a fixed-term account. That’s because interest on fixed accounts is typically paid all at once when the term ends.

• If you stashed £3,500 away at 5% for three years, you’d receive over £500 in interest in one go — enough to exceed your PSA if you're a higher-rate taxpayer, and trigger a 40% tax charge on the excess.
• £11,000 saved at 5% in an easy-access account for one year yields £550 in interest — above the £500 limit for higher-rate taxpayers.
• £21,000 at 5% for one year would bring in £1,050 in interest — more than the full £1,000 allowance for basic-rate taxpayers, meaning tax is due.

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In short: if you’re saving outside of an ISA, it’s worth checking how much interest you're earning — and whether a tax bill might be quietly heading your way.

It’s worth bearing in mind that many more sources of income than you might think can count towards your PSA. The Government says that the following can push you over the limit:

• Bank and building society accounts
• Government or company bonds
• Life annuity payments
• Payment protection insurance (PPI)
• Peer-to-peer lending
• Savings and credit union accounts
• Some life insurance contract
• Trust funds
• Unit trusts, investment trusts and open-ended investment companies

If you go over your allowance, HMRC adjusts your tax code to collect the tax via your salary or pension. They estimate your interest for the coming year based on what you earned last year — so even a one-off bonus could bump your future bills.

How to avoid unexpected tax bills

If you’re looking for a practical way to avoid unexpected tax bills on your savings, considering using ISAs first is perhaps the best way to go.

Cash ISAs are completely tax-free, no matter how much interest you earn or what your income is. You can save up to £20,000 per tax year in an ISA (across cash, stocks and shares, etc.) — and the interest won't affect your PSA.

Note also that if you're part of a couple, you can double your tax-free interest by using each person’s allowance — and each can open their own ISA.

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