Understanding untaxed interest is essential for anyone managing personal finances in the UK. When you receive a letter from HMRC referring to “untaxed interest,” it typically highlights income from savings or investments that has not had tax automatically deducted.
While some interest falls within tax-free allowances, any amount exceeding that threshold must be declared and may affect your tax code or self-assessment return.
Being aware of how HMRC handles this type of income helps prevent tax issues. This blog explains what untaxed interest means, how it is calculated, and what actions you should take if you receive such a letter.
What Does Untaxed Interest Actually Mean?
Untaxed interest is the income you earn from savings accounts, bonds, or peer-to-peer lending that hasn’t had tax deducted at source. This means the full amount is paid to you, and it’s your responsibility to report it if it exceeds your tax-free allowance.
Since 2016, most UK taxpayers benefit from the Personal Savings Allowance, £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. If your interest income goes beyond this limit, the excess becomes taxable.
HMRC receives financial data from banks and may adjust your tax code or contact you if they detect untaxed interest. It’s important to keep accurate records and declare interest where required to avoid underpayment or penalties.
While many people don’t owe tax on interest, those with significant savings or other income sources should monitor this closely.
Why Did You Receive an HMRC Letter About Untaxed Interest?
Receiving a letter from HMRC about untaxed interest typically means HMRC believes you’ve earned interest from savings or investments that hasn’t yet been taxed.
Here are common reasons for such letters:
- Your bank reported interest income: Banks and financial institutions must submit annual reports of interest payments to HMRC.
- Interest exceeded your Personal Savings Allowance: If your interest income was over the tax-free threshold for your income band, HMRC may request tax on the surplus.
- Mismatch in previous records: HMRC compares prior years’ data with current estimates and flags discrepancies.
- Inclusion of multiple accounts: HMRC may have combined several interest sources under your name, affecting your tax estimate.
These letters generally serve one of two purposes:
- To inform you of a change in your tax code, accounting for the expected tax on untaxed interest.
- To request a self-assessment tax return if your situation requires manual reporting of interest income.
Always review the letter carefully and compare the stated interest with your bank statements. If it seems incorrect, you can contact HMRC directly or update the information through your Personal Tax Account. Taking prompt action helps you avoid future issues.
How Does HMRC Know About Your Untaxed Savings and Investment Interest?
HMRC receives information directly from banks, building societies, and peer-to-peer lending platforms. These institutions are legally required to report the gross interest they pay to individuals each tax year.
Using your National Insurance number and other identifiers, HMRC aggregates this data across all your accounts. They then compare it against your declared income to check if any tax is due.
Even if you don’t report your interest income, HMRC can still track it through these third-party disclosures. This helps them decide whether to adjust your tax code or request a self-assessment tax return.
Why HMRC Uses Previous Year’s Interest Figures?
HMRC often estimates your untaxed interest based on data from previous tax years. This system allows them to act pre-emptively and avoid under-collection of tax.
Here’s why they use this approach:
- Banks report data annually, so HMRC uses last year’s figures as a basis.
- Tax codes can be updated in real time, but rely on past patterns.
- Interest income is often stable, particularly for fixed-rate or recurring savings products.
- Preventative collection reduces the likelihood of large tax bills at year-end.
However, this system can lead to discrepancies if:
- You closed an account or reduced savings.
- Interest rates dropped significantly.
- You switched financial providers or investment products.
That’s why it’s important to verify HMRC’s estimates each year, especially if your financial circumstances change.
Which Types of Income Count as Untaxed Interest?
Untaxed interest refers to income from financial sources that pay interest without deducting tax beforehand. These can include everyday savings products or more complex investments.
If your total interest exceeds your Personal Savings Allowance, you are required to report it to HMRC.
Here’s a quick overview of common sources and whether you need to declare them:
| Source | Tax Deducted at Source? | Report to HMRC If Above Allowance? |
| Savings Account | No | Yes |
| Fixed-Term Bonds | No | Yes |
| Peer-to-Peer Lending | No | Yes |
| ISAs | Tax-Free | No |
| Government or Corporate Bonds | No | Yes |
| Offshore Accounts | No | Yes |
Understanding which interest is taxable helps you avoid errors, stay compliant, and prevent unexpected tax bills later on.
Is Interest from ISAs, Gilts, or Trusts Taxable?
Interest from ISAs is completely tax-free and does not need to be reported to HMRC, regardless of the amount earned. This makes ISAs a popular vehicle for savings among UK taxpayers. However, not all products offer tax-free interest.
For instance, interest from gilts (UK government bonds) is usually paid gross but is subject to income tax if it exceeds your Personal Savings Allowance. Likewise, corporate bonds, unless held within an ISA, are taxable if your total interest surpasses your allowance.
Trust income can also include interest distributions, and in such cases, the beneficiary must declare the income unless it falls under a tax-exempt category.
If you’re unsure whether interest from a specific product is taxable, it’s crucial to check with your provider or consult your tax records. Overlooking taxable income from these instruments could result in an unexpected tax bill.
How Do Tax-Free Allowances Affect Untaxed Interest?
The UK tax system provides multiple allowances that can reduce or eliminate the tax you owe on savings interest. These allowances depend on your total income and tax band.
| Allowance | Who Qualifies | Tax-Free Limit |
| Personal Savings Allowance | Basic rate taxpayers | Up to £1,000 |
| Higher rate taxpayers | Up to £500 | |
| Additional rate taxpayers | Not eligible | |
| Starting Rate for Savings | Income under £17,570 (excluding savings) | Up to £5,000 |
| Personal Allowance | Total income under £12,570 | All interest may be tax-free |
HMRC applies these allowances in a specific order, starting with the Starting Rate for Savings, then the Personal Allowance, and finally the PSA. Knowing your income level and tax band ensures you maximise your tax-free interest.
What Steps Should You Take If HMRC’s Figures Are Incorrect?
If you believe the untaxed interest reported in your HMRC letter is incorrect, it’s important to act quickly. Discrepancies can happen for various reasons, including outdated data or incorrect reports from your bank. Here’s how to handle it.
1. Check Your Financial Records
Start by reviewing:
- Annual interest certificates from your bank
- Savings account summaries
- Online banking interest breakdowns
Compare these with the figures HMRC has estimated in their letter.
2. Contact HMRC
If you find a mismatch:
- Use your Personal Tax Account to update your records
- Call HMRC’s helpline for guidance
- Send a written correction with supporting documents if needed
3. Submit Accurate Information
In some cases, you might be asked to submit a Self Assessment return. This is especially important if:
- You are self-employed
- Your untaxed interest exceeds the threshold
- You have income from multiple savings sources
4. Retain Supporting Evidence
Keep:
- Copies of statements
- Screenshots of your online banking
- Letters from your financial providers
Prompt correction will help you avoid being overcharged and maintain an accurate tax code going forward.
Do You Need to Report Untaxed Interest Through Self-Assessment?
You must report untaxed interest through Self Assessment if your total interest income exceeds your tax-free allowance or if HMRC has specifically requested it. Individuals earning over £10,000 in interest annually are generally required to complete a Self Assessment tax return, regardless of employment status.
However, even those under this threshold may need to file if HMRC cannot collect the owed tax via PAYE adjustments. Interest from peer-to-peer lending, offshore accounts, or multiple savings sources should also be disclosed if your PSA has been exceeded.
If you’re not already registered for Self Assessment, you must do so by 5 October following the tax year in which the interest was received.
Reporting ensures your records stay accurate and prevents future penalties or backdated tax bills. Always use a tax calculator to check if you’re required to declare your savings income.
What Are the Consequences of Not Reporting Untaxed Interest?
Failing to report untaxed interest can lead to serious consequences with HMRC, especially if they discover the discrepancy through bank reports or audits. The penalties vary depending on the extent of the error and your response time.
Potential outcomes include:
- Financial Penalties: Ranging from 0% to 100% of the unpaid tax, depending on the nature of the error.
- Interest Charges: Applied on the unpaid tax from the due date until full payment is made.
- Tax Investigations: HMRC may launch a full investigation if underreporting is suspected.
- Impact on Credit Standing: Unresolved tax debts can lead to court action and damage your credit rating
Voluntary disclosure is always the safest approach. If you realise an oversight, correcting it proactively will likely result in a more lenient treatment from HMRC.
Conclusion
Understanding what untaxed interest on an HMRC letter means is essential for staying compliant and avoiding unwanted surprises. With interest from savings and investments often paid gross, the responsibility of declaring and managing this income falls on you.
By familiarising yourself with your tax-free allowances, checking HMRC’s figures, and keeping accurate records, you can prevent errors and overpayments. If you’ve received a letter from HMRC, don’t ignore it. Verify the details, update your records, and act promptly.
Staying informed and proactive ensures that your finances remain accurate, penalties are avoided, and your tax obligations are met efficiently.
Frequently Asked Questions
What is the starting rate for savings and who qualifies?
The starting rate for savings allows those with low income (below £17,570) to earn up to £5,000 in savings interest tax-free, in addition to the PSA.
Can I be taxed on interest from a joint account?
Yes, HMRC typically treats joint accounts as split 50/50 for tax purposes unless another ownership percentage is declared.
Are offshore savings accounts taxed in the UK?
Yes, UK residents must declare and pay tax on interest from offshore accounts even if it’s not taxed at source.
When does interest from peer-to-peer lending need to be declared?
Always. Interest from peer-to-peer platforms is typically paid gross and must be reported if it exceeds your allowance.
Do pensioners have to report untaxed savings interest?
Yes, if their interest exceeds their allowance or if HMRC requests it. Many pensioners benefit from the full personal allowance.
Can HMRC adjust previous year’s tax code due to untaxed interest?
Yes, HMRC can adjust your tax code retroactively if new interest information comes to light from banks or your self-assessment.
What if I have no other income except savings interest?
You may qualify for both the Personal Allowance and Starting Rate for Savings. However, report your interest to HMRC to avoid underpayment.
