HM Revenue and Customs (HMRC) has issued a warning to UK residents with over £3,500 in savings who could face unexpected tax bills as the financial year draws to a close on April 5.
The tax authority can "automatically detect" interest generated on savings accounts and will know if savers have exceeded their Personal Savings Allowance.
As reported by several news outlets, HMRC's automatic detection systems mean there's no hiding place for interest earned above the tax-free thresholds.
The Personal Savings Allowance currently stands at £1,000 for basic rate taxpayers earning less than £50,270 per year.
For higher earners in the 40 per cent tax bracket, this allowance drops significantly to just £500. The allowance sits at £12,570 and can be used to earn tax-free interest if it hasn't been fully utilised on wages, pension or other income.
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HMRC warning: Savers could be hit with tax bills
GETTYThis means higher earners could lose 40 per cent of every pound of savings interest earned above their £500 allowance.
Fixed-term savings accounts are a popular option for those who have maxed out their ISAs or are dissatisfied with low interest rates elsewhere.
These accounts typically lock away money for a set period, such as three years, but offer more competitive interest rates.
Many fixed accounts do not calculate interest until the end of the term, when it's considered "crystallised" and counted as interest generated in a single tax year.
For example, if you've saved £3,500 in a fixed savings account at five per cent for three years, you could earn over £500 in interest.
This could push higher-rate taxpayers over their £500 allowance, resulting in tax charges on the excess, analysts claim.
ISAs offer a tax-efficient alternative for savers, providing tax-free interest on savings up to the annual allowance of £20,000.
National Savings and Investments (NS&I) products, including Premium Bonds, also do not affect your Personal Savings Allowance.
On the HMRC website, the Government gave an update to bank and building customers looking to earn a notable savings boost.
The tax authority explained: "If you have a joint account, interest will be split equally between the account holders."
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Self Assessment tax customers are being reminded to report any savings interest
GETTYHowever, HMRC emphasised that if anyone believes this split should be different, they are advised to contact HMRC directly.
Those who complete a Self Assessment tax return must report any interest earned on savings through this process.
With the tax authority's ability to automatically detect interest earnings, taxpayers are being reminded to be complaint with reporting requirements is essential.
Savers are recommended to review their accounts before the tax year ends to understand their potential tax liabilities.
