Let’s not beat about the bush here, nearly everyone who builds up their savings, saves that money from income/pensions that they have already been taxed on, but, once you have earned some interest, HMRC may well take some of that as tax as well!!!
So let us explain how this additional tax grab takes place.
Once you receive £1,000 in interest on your savings (if you’re a basic rate taxpayer, it is only £500 if you are a higher rate taxpayer), then you are obliged to report this and pay the additional tax over to HMRC. These amounts are your Personal Savings Allowance (PSA).
So, your interest would then be taxed at your highest rate 20% if you’re a basic rate payer, 40% for higher rate and 45% if you’re earning over £125,140 pa this is known as the additional tax rate.
You would not be liable for any additional tax if your total earnings including the interest was under the Starting rate for Savings (currently £5,000), and your income was no more than £12,570. Once you go above this amount and have not filed a tax return before, it maybe time to sit down and prepare your 1st Tax Return. Whilst doing this though, it may be worth discussing your personal tax situation with a professional tax advisor, as there maybe ways to help you reduce the tax you pay on interest earned or other sources of income.
Remember, the tax man does not tell you, you have to know if your savings breaches anything and report on a timely basis, otherwise interest and penalties could apply.