HMRC is issuing demand letters to people who have exceeded the Personal Savings Allowance and could face an unexpected tax bill in the new tax year

Those with as little as £3,500 in fixed-rate savings accounts could face an unexpected tax demand from HM Revenue and Customs (HMRC) in the new tax year. This is because HMRC is capable of automatically identifying interest earned on savings held in your bank account, and should you exceed a certain threshold, you will automatically receive notification of an additional tax liability.

With the 2025-2026 tax year now officially drawing to a close and a new tax year commencing just after midnight on Monday, April 6, the taxman is gearing up for another round of correspondence, adjusting people’s tax codes to recoup any underpaid tax. HMRC will begin evaluating individuals’ final financial positions for the tax year ending today, and will issue tax demands to those found to owe tax on savings accounts in the months ahead.

Such details are automatically passed on to the taxman by your bank, unless the funds fall within the deposit limit of a Cash ISA, which remains shielded from taxation.

The Personal Savings Allowance rules permit you to earn up to £1,000 per year in savings interest across your bank accounts without being taxed, though this exclusively applies to those earning below £50,270. Should your income reach £50,271 or above, your Personal Savings Allowance is reduced to just £500. For those earning £125,140 or more, the Personal Savings Allowance disappears entirely.

The precise amount owed will depend on your overall earnings, the level of interest received, and when that interest was paid. However, you could find yourself facing a tax bill with as little as £3,500 in savings — for instance, if you had placed it into a fixed savings account for three years. In such a scenario, because the interest is paid out all at once on the date the fixed account matures, it counts within a single tax year, reports the Express.

Should you deposit £3,500 into a fixed savings account at 5% for three years, you will accrue more than £500 in interest. With fixed accounts, the interest is “crystallised” the moment it is paid out, and you receive all the interest in one payment.

With just over £500 being paid out at once, combined with earnings of £50,270 or more in the same year, you would exceed your £500 Personal Savings Allowance — even without factoring in any interest from other accounts you hold — and can expect a letter from HMRC along with a tax code change.

For higher-rate taxpayers, the situation is even more costly, as you lose 40% of every £1 over £500, rather than 20%. This means that exceeding the Personal Savings Allowance by just £100 would result in an additional £40 tax bill.

Those with greater sums in savings could breach the allowance even with a straightforward easy-access account within a single year. For example, depositing £11,000 in a savings account for one year at 5% would generate £550 in interest, pushing you above the threshold and leaving you liable to pay tax to HMRC if your earnings exceed £50,270. Even if you earned less than £50,270, if you had savings of £21,000 at 5 per cent for one year, you would generate £1,050 of interest and owe money to HMRC because you would exceed your £1,000 allowance.

There are, in fact, numerous different potential sources of income that count towards your Personal Savings Allowance.

According to the Government, the accounts affected are:

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

HMRC adds: “If you go over your allowance, you pay tax on any interest over your allowance at your usual rate of income tax.

“If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically.

“To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year.”