HMRC sending surprise tax bills to people with savings accounts | Personal Finance | Finance

Thousands of people with savings accounts are set to be hit with a shock tax bill from HMRC following the end of the tax year. His Majesty’s Revenue and Customs normally sends out P800 letters, at the end of each tax year, after April 6.

That’s because everyone’s tax and financial situations are based on financial years which run from April 6 to April 5 the following year. Once all your pay, pensions, savings, expenses and other factors are taken into account, HMRC will work out if you paid too much tax – or too little.

And one element which could catch a lot of people out this year is interest on savings. Banks automatically inform HMRC about the amount of interest they have paid out on savings, which means if you inadvertently exceeded your savings allowances, you could be stung with a HMRC bill.

A basic rate taxpayer, who earns up to £50,270, can earn £1,000 of interest in a single year before they are liable to pay tax on it.

But someone earning £50,270 or more would only be allowed to earn £500 of interest before they need to pay tax, and an additional rate taxpayer – who earns £125,000 or more – cannot earn any savings interest without owing tax.

With savings rates hitting 4-6% on many accounts in the past 12 months, you would only need about £20,000 of savings if you’re a basic rate taxpayer, or £10,000 if you’re a higher rate taxpayer to go over your Personal Allowance and owe HMRC tax, on a 5% savings account.

For fixed savings accounts running for several years, you would need even less money in your account to go over limits because these are paid out all in one go, so it counts in one tax year. For example, £5,000 fixed at 5% for three years pays out more than £500 in one go.

When this happens, the information reported by your bank to HMRC would trigger the taxman to issue a P800 notice. Usually, this would be collected by a change of tax code on your PAYE earnings, and would see the interest taken from you at your rate of tax, between 20% and 45%.

HMRC says about the tax notices: “At the end of each tax year, HMRC send customers an End of Year Tax Calculation – P800 if they have under or overpaid their taxes. This personalised letter indicates whether the recipient needs to pay more tax or is eligible for a refund, the amount involved and how the payment or refund will be made.

“It also provides a more detailed breakdown of the tax calculations to help them understand how HMRC have come to the relevant conclusions and figures. In most cases, customers do not need to contact HMRC after they receive a P800. Customers are asked to contact HMRC, if there is an error.”