HMRC Targets Savers: Are You Affected by the £3,500 Savings Letter?

On: Tuesday, April 15, 2025 11:32 AM

HMRC Targets Savers: Are You Affected by the £3,500 Savings Letter?

Earlier this year HM Revenue & Customs (HMRC) wrote letters to UK savers with saving over £3,500. These letters warn that in such circumstances, they could lose their Personal Savings Allowance, which is the interest they earn and also they may end up paying tax. In fact, due to the rise in interest rates more people have gone above the tax free limit, and are now in danger of getting a nasty tax bill out of the blue. So in this article we are going to explain what this letter from HMRC is and how savings tax works, as well as how you can manage your money so you pay no tax and comply with the rules.

Focus on HMRC and Savers

Following rising interest rates and rising millions of UK savers going above their Personal Savings Allowance (PSA), HMRC has now started to send out tax letters.

If you have been issued a letter from HMRC or believe you may have to pay tax, you should:

Check your savings interest
Use tax-efficient accounts
Stay informed of tax deadlines

What is the PSA?

With the introduction of the Personal Savings Allowance (PSA) in 2016, the government tried to ensure that people are not liable for tax without earning a certain amount of interest on their savings. This allowance is dependent on your income band for tax.

Basic rate taxpayers (20%): Interest paid up to not more than £1,000 is tax free

(40% rate taxpayers): Interest tax free up to £500

Additional-rate taxpayers (45%): No tax-free allowance

If your interest amount exceeds the PSA, the rest will be taxed at your normal income tax rate.

Example of how PSA works:

Thus for a basic rate taxpayer the £1,200 interest will attract £200 which is 20% = £40 tax.

So if a higher rate taxpayer makes £800 in interest he would have to pay 40% tax on the extra £300 = £120 tax.

Why is HMRC Paying Attention to Savers?

Interest rates have increased significantly over the past two years, with many banks now offering interest rates of up to 5%. This means savers are now earning more interest than ever before.

Examples:

£10,000 at 5% interest = £500/year

£20,000 at 5% interest = £1,000/year (reaches PSA limit for basic-rate taxpayer)

£30,000 at 5% interest = £1,500/year (exceeds PSA and tax is due)

That’s why HMRC is now sending out tax notifications to make sure people report and pay the correct tax on their savings.

How Does Taxing Savings Interest Work?

If you have interest on savings that is above the PSA, you will have to pay tax on that extra interest:

Basic-rate taxpayers: 20%

Higher-rate taxpayers: 40%

Additional-rate taxpayers: 45%

Example:

Basic-rate taxpayer earns £1,200 → £200 above PSA taxed at 20% = £40

Higher-rate taxpayer earns £800 → £300 above PSA taxed at 40% = £120

Why Are HMRC Letters Delayed?

HMRC usually sends out P800 tax calculations in November to inform taxpayers whether they have to pay tax. But this time, some P800 letters will be sent out late, until March 2025, due to an increase in savings interest data.

This means many people won’t find out they owe tax until the new tax year starts.

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Are You Liable to Pay Tax?

If you’ve received a letter from HMRC or think you owe tax, take the following steps:

Check Your Bank Statements

Your bank or building society should provide an annual statement detailing how much interest you’ve earned.

Use HMRC’s Personal Tax Account

Calculate Your Tax

Compare your total interest earnings to the PSA.

If you earn more than the PSA:

Basic rate (20%) → tax on interest above £1,000

Higher rate (40%) → tax on interest above £500

Additional rate (45%) → tax on all interest

Wait for a Tax Letter from HMRC

You will receive a P800 letter or Simple Assessment showing how much tax you owe.

Ways to Avoid Tax Legally

Use an ISA (Individual Savings Account)

You can earn up to £20,000 a year in tax-free interest.

Consider Premium Bonds

NS&I premium bonds offer tax-free prizes instead of interest. It’s like a lottery.

Split Savings Between Family Members

If your partner pays a lower tax rate, you can share savings to maximise tax-free allowance.

Claim the Starting Rate for Savings

If your income (excluding savings) is below £17,570, you may qualify for an extra £5,000 of tax-free interest.

Frequently Asked Questions (FAQs)

What should I do if I’ve received a letter from HMRC?

Check your bank statement to confirm how much interest you’ve earned.

If your interest is more than the PSA, you’ll need to pay tax or contact HMRC if you think there’s been a mistake.

Will HMRC automatically deduct tax from my account?

Usually, tax is adjusted through your PAYE tax code. This means it’s deducted from your salary or pension.

What happens if I ignore the letter?

You may face penalties and interest on unpaid tax.

Can I challenge HMRC’s tax calculations?

Yes. If you think HMRC made a mistake, you can contact them and provide correct details.

What are legal ways to avoid tax on savings?

Use ISAs
Consider premium bonds
Share savings with family
Claim the Starting Rate for Savings

Conclusion

Ignoring letters from HMRC can be risky. Regularly review your savings, monitor your interest income, and take advantage of tax-free savings tools like ISAs and Premium Bonds. With the right planning, you can keep your savings safe from tax and stay stress-free.