Rising bank interest rates have brought good news for UK savers, but there’s a catch. In 2025, HM Revenue and Customs (HMRC) is cracking down on savings tax, and anyone with £2,500 or more in savings could face a surprise tax bill. With the Personal Savings Allowance (PSA) staying the same and interest rates climbing to 4-5%, more people are earning enough interest to owe tax. HMRC has issued warnings to help savers avoid fines, and new rules starting in 2027 will make it easier for them to track your savings. This article breaks down what’s happening, why it matters, and how to keep your money safe.
Why HMRC Is Watching Your Savings
Higher interest rates mean your savings account is likely earning more than it did a few years ago. For example, £2,500 at 5% interest earns £125 a year, and with the PSA set at £1,000 for basic rate taxpayers, it’s easy to cross the tax-free limit if you have more saved. HMRC gets details of your interest directly from banks and building societies, so they know exactly what you’re earning. If your interest goes over your PSA, HMRC might adjust your tax code or send you a bill. Many savers don’t realise they owe tax until it’s too late, which is why HMRC is sending out alerts now to avoid penalties.
Understanding the Personal Savings Allowance
The PSA lets you earn some interest without paying tax, but it depends on your income. Here’s how it works in the 2025/26 tax year:
- Basic rate taxpayers (income £12,570–£50,270): £1,000 tax-free interest
- Higher rate taxpayers (income £50,271–£125,140): £500 tax-free interest
- Additional rate taxpayers (income over £125,140): £0 tax-free interest
Your bank reports your interest to HMRC at the end of the tax year (5 April). If your total income, including interest, pushes you into a higher tax band, you’ll owe tax on anything above your PSA. For instance, a basic rate taxpayer with £20,000 saved at 5% earns £1,000 in interest, which uses up their entire PSA. Any extra interest is taxed at 20%.
New Rules Coming in 2027
From April 2027, banks will have to collect National Insurance numbers from anyone with a savings account. This will help HMRC track your interest more easily and bill you accurately. The rule applies to new and existing accounts, so you might get a letter asking for your NI number soon. Another change is coming for Individual Savings Accounts (ISAs). From 15 July 2025, new regulations will allow more investment types in ISAs, like Long Term Asset Funds, and make it easier to withdraw and replace money in flexible ISAs without losing tax-free status.
Savings Tax at a Glance
Here’s a quick look at how savings tax works for different taxpayers in 2025/26:
| Tax Band | Income Range | PSA | Tax Rate on Excess Interest |
|---|---|---|---|
| Basic Rate | £12,570–£50,270 | £1,000 | 20% |
| Higher Rate | £50,271–£125,140 | £500 | 40% |
| Additional Rate | Over £125,140 | £0 | 45% |
How to Avoid a Surprise Tax Bill
To stay ahead, check your savings interest regularly. If it’s close to or over your PSA, consider these steps:
- Move money to an ISA, where interest is tax-free up to £20,000 a year
- Split savings with a partner who has a lower tax band
- Invest in Premium Bonds, where prizes are tax-free
- Keep your total income under £17,570 to use the £5,000 starting rate for savings
If you get a tax bill, don’t ignore it. Check the details, contact HMRC if it seems wrong, or set up a payment plan. You can also claim back overpaid tax if HMRC miscalculates.
Stay Smart and Save Wisely
With interest rates up and HMRC tightening the rules, now’s the time to get clued up. Monitor your savings, use tax-free options like ISAs, and keep an eye on your tax code. If you’re unsure, a quick chat with an accountant can save you stress. By acting now, you can avoid HMRC’s tax trap and keep more of your hard-earned savings.