I don't currently work and draw a monthly income through my savings - will I be hit with a tax bill for the interest?
In the financial year 2024/25, I was in employment until the summer of 2024 – I was a higher-rate taxpayer.
Since then, I have been unemployed and am drawing an income from a substantial pot of savings.
In terms of my savings, I definitely breached my £500 personal savings allowance for 2024/25.
But now am I'm confused as to what my PSA is – and whether HMRC will hit me with a big tax bill somewhere along the line.
I'm in my late 30s and don't draw an income from anywhere else, just from my savings – including easy-access, monthly income, NS&I income bonds, Premium Bonds and once a year from fixed rate accounts.
I also have Isas and investments, but they are currently growing – I'm not drawing any income from them.
Am I being paranoid, will HMRC send me a tax bill and how does it know how much interest I earn from my savings?
Lucie Spencer, financial planning partners at wealth manager Evelyn Partners replies: Whether or not you have breached your Personal Savings Allowance (PSA) depends on how much taxable income you earn in the 2025/26 tax year.
As you are currently unemployed and no longer working full-time, you may end up being a basic rate taxpayer depending on when you start working before the end of this financial year.
In that instance, your PSA will have doubled to £1,000 from £500, which, put simply, means that you can earn up to £1,000 in interest on your cash savings before you are liable for tax at your marginal rate of tax.
However, you could end up with an even bigger PSA than you realise.
As you remain unemployed, you still have your personal allowance of £12,570 to swallow up some of your savings interest.
Low earners can use their personal allowance of £12,570 to earn interest tax-free if it has not been used up by earnings or other income, such as a pension.
Those earning less than £12,570 receive an extra £5,000 tax-free allowance for their savings income, known as the starting rate for savers.
This means an individual can earn £12,570 in income and £6,000 in savings interest (£5,000 starting savings allowance plus the personal savings allowance of £1,000) - that's a total of £18,570 from wages and savings interest before tax is applied.
However, things get a little more complicated for those earning between £12,570 and £17,570 as for every £1 of non-savings income above the personal allowance, they lose £1 of their starting savings allowance.
There may be a challenge from your one-year fix. The point at which a nest egg is liable for tax can depend on the interest rate applied to the account so a fixed-rate account that pays out all the interest at maturity could create a tax headache if all the interest gets paid out in a tax year where you have a substantial income.
Ultimately, how much tax you must pay on your savings at the end of this financial year will depend on your total taxable income, including any future employment that starts before April 6, 2026, and the level of interest you earn.
Anna Bowes personal finance expert at The Private Office replies: I'd say you are being sensible rather than paranoid, as it is important to be aware of any tax that you might owe. And of course, it not that easy to navigate.
The PSA is linked directly to your income tax band, which is based on your total taxable income for any given tax year (6 April to 5 April). And the PSA is different depending on the level of tax you pay in that year.
If you are a basic rate taxpayer, your PSA is £1,000 of tax-free savings interest.
It's £500 if you're a higher-rate (40 per cent) taxpayer.
But if you are an additional-rate (45 per cent) taxpayer, you do not have a PSA at all.
You mentioned that you were employed until the summer of 2024. If the income from your savings and your salary took you into the higher rate tax bracket in 2024/25 then your PSA was £500, regardless of whether you were only employed for part of the year. The PSA is based on your marginal rate over the course of the tax year.
Onto the current tax year – if the total taxable income from your savings and investments is less than the higher rate tax threshold, but more than the personal allowance of £12,570, then you are likely to be a basic rate taxpayer.
But again, it depends on what your income is over the whole tax year, so if your circumstances change before 5 April next year and your income takes you over the higher rate threshold, then your PSA will again be £500.
One thing to note is that, of the savings accounts you have mentioned, Premium Bonds prizes, and any interest earned on Isas are tax-free and don't count towards your taxable income or PSA.
As you are not currently earning anything from wages or pensions, you may be able to use the full £5,000 of tax-free interest from the starting rate for savers.
Tom Minnikin, partner at tax firm Forbes Dawson replies: If your only income is from earning interest – and assuming the income is less than £100,000 – you will qualify for various tax-free allowances.
These are: The personal allowance of £12,570; the starting rate for savings which is £5,000; and the PSA - £1,000 if you are a basic rate taxpayer or £500 if you are a higher rate taxpayer.
If you earn more, you will be taxed at either 20 per cent or 40 per cent. This depends on whether the income falls into the basic rate or higher rate tax bracket.
Interest is taxable in the tax year it arises. This is typically when the interest is credited into your account, provided it is available to draw.
Some accounts prevent access to interest until the end of a fixed period. In these circumstances, the interest will only arise at the end of the period. However, if the interest can be freely drawn but will incur a penalty, this remains taxable at the point it is available.
Prizes from premium bonds - like interest - are not taxable. Income earned through an Isa wrapper is also tax-free.
Will HMRC send you a tax bill?
Anna Bowes replies: Banks, building societies and NS&I report your taxable interest directly to HMRC each year.
When HMRC receives this information, it checks if you've gone over your PSA.
If you have, any tax due will usually be collected via a change to your tax code in the following year – assuming you're back in employment and therefore part of the PAYE scheme.
If you are not employed, you may need to fill in a Self Assessment return and pay the tax due.
The bottom line though is that it is your responsibility to make sure you pay any tax due - if your interest does exceed your PSA, you will owe tax at your marginal rate for that tax year on the excess.
So, keep track of how much interest you are earning and estimate your overall likely tax rate.
If you expect to exceed your PSA again and in the future, it may be worth putting more into Isas if possible, where interest and growth are sheltered from tax altogether.
Lucie Spencer replies: If the interest you earn on savings is over £10,000 you need to complete a Self-Assessment tax return.
If you remain unemployed and don't complete Self-Assessment to self declare the interest you earn, your bank or building society will inform HMRC at the end of the tax year of how much interest you earned.
You will then be notified on how much tax you need to pay, though you may find, if your income is lower and you can boost the tax efficiency of your savings, that the amount may be negligible.
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