Money saving expert Martin Lewis has issued a crucial alert to Britons who hold fixed-rate savings accounts, highlighting potential pitfalls with how tax on interest is calculated.
The Personal Savings Allowance Explained
Speaking on his BBC podcast, the financial journalist reminded listeners of the Personal Savings Allowance (PSA). This rule allows basic-rate taxpayers to earn £1,000 in savings interest per year before any tax is due. For higher-rate taxpayers, the allowance is £500. Additional-rate taxpayers receive no allowance.
"The majority of people in the country do not pay tax on their savings interest because of these allowances," Lewis stated. He emphasised that non-taxpayers also have protections, with their interest counting towards their personal allowance.
HMRC's 'Non-Transparent' Calculations and How to Fight Back
The discussion turned to a common complaint from listeners: HMRC making incorrect estimates of interest income, leading to over-taxation through PAYE codes. Listener Matt questioned why the tax office's calculations lack transparency, failing to show the specific accounts and values used.
Chartered accountant Rebecca Benneyworth explained that HMRC often estimates based on previous years' data, which can be outdated. She cited a case where a client was overtaxed for seven years after stopping a rental income stream.
Martin Lewis agreed on the lack of clarity, noting that tax coding notices provide a "round sum" reduction without itemised details. His advice for those affected is clear: Write a formal letter to HMRC. "Detail everything... it’s the type of thing AI is good at helping you with, although obviously you check every single thing," he advised, urging people to demand an investigation.
The Critical Rule on When Interest is Taxed
A key warning centred on a listener's experience with a two-year fixed bond. All the interest was paid on maturity, pushing their total outside the ISA allowance in one tax year and triggering a tax bill. Had the interest been allocated across the two years, no tax would have been due.
Lewis clarified the vital rule: Interest is taxable in the year it becomes accessible, not necessarily when it is paid. For many fixed bonds where interest is rolled up, you cannot access it until the bond matures. Therefore, the entire sum is taxed in the year of maturity, not spread over the bond's term.
"It’s very important - it’s not whether you access the interest, it’s whether the interest is accessible," he stressed. He expressed concern that banks may be reporting interest to HMRC based on payment dates rather than accessibility, leading to incorrect tax demands.
On joint accounts, Lewis gave a simple answer: for tax purposes, interest is split equally between account holders, regardless of their individual tax codes.
