Thousands of Brits face surprise tax bill letter from HMRC

People with savings of £3500 or more are being warned that they may receive an unexpected tax bill from HM Revenue and Customs (HMRC) in the forthcoming weeks. HMRC has the capability to automatically detect interest accrued on your bank savings, and if this exceeds a certain limit, you will be issued a notice for an additional tax payment.

With the new 2025-25 tax year already underway, the tax authority has been dispatching letters to individuals, urging them to register for self-assessment or instructing them to pay extra tax. Now that the entire previous financial year has concluded, HMRC is evaluating people's financial circumstances and issuing tax bills to those found to owe tax on their savings accounts.

READ MORE: Savvy shoppers save £100 on permanent hair removal gadget plus an extra 20% off

Your bank automatically reports these details to the taxman unless your savings are held in a Cash ISA, which is tax-exempt, reports the Daily Record.

Under the Personal Savings Allowance rules, you can accumulate up to £1000 per annum in savings interest in your bank accounts without it being taxed, but this only applies to individuals earning less than £50,270.

If your earnings exceed £50,271, your Personal Savings Allowance is reduced to a mere £500. And if your income reaches £125,000, your Personal Savings Allowance plummets to £0. The precise amount you will owe depends on your earnings, the amount of interest you received, and when it was paid out.

However, you may face a tax bill with savings as low as £3500 if you had invested it in a three-year fixed savings account, as the interest is paid out in a single lump sum.

In a fixed account, the interest is considered taxable in the year it is received, rather than being spread out over the account's term.

For instance, if you deposited £3500 into a three-year fixed savings account earning 5% interest, you would accrue over £500 in interest.

The interest on fixed accounts is "crystallised" upon payout, meaning you receive the entire interest amount at once. In this scenario, the £500+ interest payment would exceed your £500 Personal Savings Allowance, potentially triggering a letter from HMRC, especially if you have other interest-earning accounts.

High-income earners should be aware that exceeding the Personal Savings Allowance by just £100 would result in a £40 tax liability, as 40% of every £1 above the allowance is taxed.