Have you recently received a letter from HMRC about tax on your savings? If so, you’re not alone. Thousands of UK savers are being contacted by HMRC in 2025 due to changes in how interest on savings is reported and taxed.
With rising interest rates and more people saving, many are now exceeding their tax-free allowances without even realising it.
Understanding these letters is crucial to avoid unnecessary penalties and stay on top of your finances. This blog will help you make sense of the situation.
What is HMRC Tax Savings Letters?
HMRC tax savings letters are official communications sent to individuals whose savings interest has exceeded tax-free limits set by the government.
These letters typically inform recipients about an underpayment or overpayment of tax related to income earned from savings accounts, fixed-term deposits, or other interest-bearing financial instruments.
The letters are based on data automatically reported to HMRC by banks and financial institutions at the end of each tax year.
As of 2025, if you earn more than your Personal Savings Allowance or fall into a higher tax band, HMRC may calculate tax due and adjust your tax code accordingly.
These letters serve both as a notice and a prompt to take action, whether it’s paying additional tax, updating personal information, or reclaiming any overpaid amounts.
Why Are People Receiving HMRC Savings Account Tax Letters in 2025?
With the new tax year in full swing, a growing number of savers have found HMRC letters in their post. But why is this happening?
Rising Interest Rates and Fixed Accounts
Recent interest rate increases mean that even modest savings accounts can generate enough interest to exceed tax-free allowances.
Fixed-term accounts, in particular, can cause a spike in interest payouts because the entire interest is often paid at once at maturity, rather than spread out. This can push savers above their allowance in a single tax year, triggering a tax bill.
£3,500 Savings Threshold Trigger
One of the key figures making headlines is £3,500. If you place this amount into a fixed savings account for three years at 5%, the interest payout at maturity can surpass the £500 Personal Savings Allowance for higher-rate taxpayers. This specific scenario is resulting in unexpected letters for many.
Automatic Reporting by Banks
Banks and building societies are now required to report your earned interest directly to HMRC. If this amount surpasses your allowance, HMRC is automatically alerted and will calculate the amount you owe or have overpaid.
This streamlining has resulted in more accurate but also more frequent tax letters being sent out.
Interest Earnings and Impact on Allowance
| Savings Amount | Interest Rate | Term | Interest Earned | Tax Band | Tax Implication |
| £3,500 | 5% | 3 Years | £525 (1 year) | Higher Rate | Tax due on £25 |
| £11,000 | 5% | 1 Year | £550 | Higher Rate | Tax due on £50 |
| £21,000 | 5% | 1 Year | £1,050 | Basic Rate | Tax due on £50 |
Even small differences in savings amounts or income bands can shift you into taxable territory. That’s why many are receiving these letters unexpectedly in 2025.
What Do the Personal Savings Allowance and Starting Rate for Savings Mean in 2025?
Understanding your tax-free savings entitlement is crucial in 2025, especially as more people exceed their limits due to rising interest rates. The Personal Savings Allowance (PSA) and Starting Rate for Savings offer some relief, depending on your total income.
If you earn less than £50,270 annually, you can receive up to £1,000 in savings interest tax-free. For those in the higher income band, the PSA reduces to £500. If you earn over £125,140, the allowance is removed altogether.
The Starting Rate for Savings of £5,000 applies only to those with total income under £17,570, and it reduces pound-for-pound as your income rises above the standard Personal Allowance.
Here’s a clear breakdown of how the PSA applies:
Personal Savings Allowance by Income Band
| Income Tax Band | Allowance Amount |
| Basic Rate (up to £50,270) | £1,000 |
| Higher Rate (£50,271 to £125,140) | £500 |
| Additional Rate (above £125,140) | £0 |
These limits apply to savings interest earned from bank and building society accounts, credit unions, peer-to-peer lending, investment trusts, and more. ISAs remain tax-free and are not included in the PSA calculation.
How Does HMRC Calculate Your Tax Code Based on Previous Year’s Interest?
HMRC doesn’t just look at what you earned this year, it estimates your current savings interest by analysing your previous year’s figures.
If you earned significant interest in the last financial year, HMRC may assume similar earnings for the current one and adjust your tax code accordingly.
This means you could find your tax code changed without prior warning. The adjustment is intended to collect tax due automatically through PAYE if you are employed or receive a pension.
However, these estimates are not always accurate, especially if your savings have changed or interest rates have varied significantly.
If you believe your estimated income is incorrect, it’s important to contact HMRC to request a correction and avoid underpaying or overpaying tax.
What Should You Do If You Receive a Tax Overpayment or Underpayment Letter?
Receiving a letter from HMRC about a tax overpayment or underpayment can be concerning, but acting swiftly is important. These letters outline whether you’ve paid too much or too little tax on your savings interest and what steps to take next.
If you receive a letter:
- Read it thoroughly: Understand what tax year it refers to and what calculation has been made.
- Compare with your bank statements: Match the interest HMRC refers to with your own records.
- Check the allowances: Confirm whether the Personal Savings Allowance or Starting Rate for Savings has been correctly applied to your case.
- Follow instructions: HMRC will usually provide steps to repay underpaid tax or claim back overpayments.
- Act by 31 March 2025: If you were expecting a letter but didn’t receive one, you must contact HMRC before this date to avoid penalties.
Overpayment refunds can often be requested online or through your Self Assessment return. Underpayments, on the other hand, may be automatically deducted from your salary or pension through your tax code.
Are You Automatically Taxed on Savings If You’re Employed or on a Pension?
Yes, if you are employed or receive a pension, HMRC typically collects tax on your savings interest automatically. They do this by adjusting your PAYE tax code based on an estimate of how much interest you’ll earn in the current tax year.
This system means you often won’t need to pay your savings tax separately, as it’s deducted gradually through your wages or pension income.
How Is Tax Collected Without Self-Assessment?
If you’re not self-employed and don’t normally file a tax return, HMRC uses your tax code to collect tax. They estimate your savings interest based on the prior year’s earnings, and adjust your PAYE tax code accordingly.
This adjusted code tells your employer or pension provider to deduct slightly more or less tax, ensuring the correct amount is paid gradually over the year.
When Will HMRC Contact You If You Owe Tax?
HMRC typically reviews financial data after the end of each tax year. If they find you’ve exceeded your savings allowance, they’ll send a letter by 31 March of the following year.
If no letter arrives by then and you suspect an error, you must contact HMRC immediately to avoid late payment penalties. This timeline helps ensure tax is collected or refunded within the proper financial cycle.
Who Must Register for Self-Assessment Due to Savings Income?
Not everyone needs to register for Self Assessment. However, HMRC requires registration in certain cases where savings and investment income reach specific thresholds or circumstances apply.
You must register if:
- Your savings or investment income exceeds £10,000 in a tax year.
- You’re self-employed and your savings income isn’t taxed through PAYE.
- You receive foreign interest or have complex investment portfolios.
- HMRC has not already deducted the correct tax through your code.
Steps to register:
- Visit the official government portal to register online.
- Ensure you have your National Insurance number and personal details ready.
- Registration should be done by 5 October following the end of the tax year.
- Submit your Self Assessment return by the deadline, usually 31 January.
Filing helps HMRC accurately calculate what you owe and avoids surprises later.
How Can You Reclaim Overpaid Tax on Savings Interest?
Overpayments can happen when HMRC estimates your interest too high or if you’ve earned less than your allowance. Thankfully, reclaiming overpaid tax is relatively straightforward if you follow the correct process.
You can reclaim tax if:
- Your total interest was below your allowance.
- HMRC wrongly adjusted your tax code.
- You paid tax through Self Assessment that shouldn’t have been applied.
How to reclaim:
- Use the HMRC online tool or fill out a postal form R40.
- Submit bank statements showing actual interest earned.
- File within four years of the end of the relevant tax year.
- Claims can be made through your Self Assessment return if applicable.
- Wait for confirmation or direct refund into your bank account.
Being proactive ensures you don’t miss out on reclaiming what’s rightfully yours.
Are HMRC Tax Letters Legitimate or a Scam? Here’s How to Check
While most HMRC letters are legitimate, scams have become more common. Genuine HMRC letters will never ask you to provide sensitive information like passwords or banking PINs. They’ll also include your unique taxpayer reference and will be printed on official stationery.
To verify a letter’s authenticity:
- Check the official HMRC website for formatting guides.
- Contact HMRC using published phone numbers, not those in the letter.
- Avoid clicking on links or calling unknown numbers.
- Look out for poor grammar, threats, or urgency, common scam indicators.
Staying vigilant protects you from falling victim to fraud while still dealing with genuine tax matters.
Conclusion
HMRC tax savings letters are becoming increasingly common as more people unknowingly exceed their savings allowances. With automatic reporting and changing interest rates, even small savers could find themselves owing tax.
Understanding your allowances, how your tax code is adjusted, and how to respond to HMRC communications is essential.
Whether you owe tax or are due a refund, acting quickly will save you stress and ensure compliance with the latest rules. Stay informed and keep track of your savings activity to avoid any surprises.
FAQs About HMRC Tax Savings Letters
What counts as taxable interest under HMRC’s savings rules?
Interest from bank accounts, investment funds, bonds, and non-ISA savings are typically taxable.
How can joint savings account holders be taxed?
Interest is split equally between account holders unless notified otherwise to HMRC.
What if I didn’t get a tax letter by 31 March 2025?
You should contact HMRC immediately to avoid penalties or missed notifications.
How do I calculate the tax due if I exceed my Personal Savings Allowance?
Add your total interest to your other income and apply the appropriate tax band rate.
What happens if I save using multiple accounts across different banks?
HMRC combines all reported interest to calculate total taxable income from savings.
Does PPI compensation or life insurance interest count toward savings tax?
Yes, some payments from PPI or life annuities are included in taxable interest.
Can I get help from HMRC if I disagree with their savings income estimate?
Yes, you can contact HMRC to request a correction and provide accurate interest records.
