HMRC is sending out letters to people with more than £3,500 in a specific type of savings accountThe change is happening as the new tax year begins(Image: Getty Images)

HMRC is warning people with £3,500 or more in their savings account that they could face an unexpected tax bill. The government department is sending out notices of extra tax bills to those who generate over a certain threshold in interest on their savings.

HMRC is able to automatically detect interest on savings generated by your bank account and if you tip over a certain threshold you will automatically be sent a notice of an extra tax bill.

With the new tax year having started last month in April, many people will have received a letter urging them to register for self-assessment or asking them to pay extra tax, the Express reports.

Because we are now in a new tax year, the government is assessing people’s final situations from the previous tax year and issuing tax bills to those who it finds owe money in tax on savings accounts. The information is automatically reported to HMRC by your bank – unless your money is in a Cash ISA, which is protected from tax.

HMRC said: “If you go over your allowance, you pay tax on any interest over your allowance at your usual rate of income tax.

“If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically.

“To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year.”

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Your Personal Savings Allowance – the amount of interest you can earn on your savings each year without paying tax on it – allows you to make £1,000 per year in savings interest without being taxed on it, but this only applies to people earning less than £50,270.

If you earn £50,271 or more your Personal Savings Allowance is cut to just £500. And if you earn £125,000, your Personal Savings Allowance drops to £0.

The exact amount you will owe depends on how much you earn, how much interest you got, and when it was paid out.

Because of these rules, this means you could face a tax bill if you have as little £3,500 in savings. Put in a fixed savings account at 5% for three years you will earn more than £500 in interest.

That’s because with fixed accounts the interest is “crystallised” the moment the interest is paid out and you receive all the interest at once. So if you put it away for three years, the money is paid out all in one go at the end of that three-year term, meaning the interest counts in only one tax year all at once.

So, this means you would go over your £500 Personal Savings Allowance just from the interest earned on your savings in this account, and HMRC may send you letter taxing this interest.

And because you are a higher-income earner, you lose 40% of every £1 over £500, not 20% – meaning exceeding your Personal Savings Allowance by £100 would cost you £40.

But, if you had more money in savings, you could go over the allowance even with a non-fixed, easy-access account. For example, if you put £11,000 in a savings account for one year at 5%, you would earn £550 of interest, which would push you above the threshold and mean you owe tax to HMRC if you earn over £50,270.

Even if you earned less than £50,270, if you had savings of £21,000 at 5% for one year, you would generate £1,050 of interest and owe money to HMRC because you would exceed your £1,000 allowance.

According to the Government, all of the different potential sources of income that count towards your Personal Savings Allowance are:

  • Bank and building society accounts
  • Savings and credit union accounts
  • Unit trusts, investment trusts and open-ended investment companies
  • Peer-to-peer lending
  • Trust funds
  • Payment protection insurance (PPI)
  • Government or company bonds
  • Life annuity payments
  • Some life insurance contracts