With higher interest rates, many people are earning interest on their savings for the first time in years and discovering that this income might be taxable.
This naturally leads to a common, anxious question: "Do I need to register for Self Assessment?"
For most people, the answer is no. But it's not always simple.
It's a myth that HMRC doesn't know about your savings. They do. Banks and building societies are legally required to report the interest you earn. The real question is how that tax is paid.
This guide will walk you through your obligations, the tax-free allowances you get first, and the three key scenarios that determine if you need to file a tax return.
1. How HMRC Knows About Your Interest
First, let's be clear: there is no "hiding" bank interest.
UK banks, building societies, and other financial institutions have a legal duty to send a report to HMRC each year. This report, known as a "Bank and Building Society Interest (BBSI) return," details all the interest paid to UK savers.
Source: This is a legal requirement. HMRC's internal manuals confirm they receive this data under Schedule 23 of the Finance Act 2011 and use it to check Self Assessment returns and issue PAYE coding notices.
- Source: GOV.UK - Bank and building society interest returns
- Source: HMRC Manual SAIM2010 - Interest: introduction
This means HMRC knows what you've earned, often before you do. They use this data to decide if you owe tax and, if so, how to collect it.
2. Your Tax-Free Allowances (Why Most People Don't Pay)
Before you panic, remember that almost every saver gets a tax-free allowance. You only pay tax on interest above this allowance.
Since 2016, banks no longer take tax from your interest automatically. Instead, you get a Personal Savings Allowance (PSA).
The amount of your PSA depends on your Income Tax band:
- Basic-rate (20%) taxpayers: You can earn £1,000 in interest per year, tax-free.
- Higher-rate (40%) taxpayers: You can earn £500 in interest per year, tax-free.
- Additional-rate (45%) taxpayers: You get a £0 allowance.
Note: If you have very low non-savings income (e.g., under your £12,570 Personal Allowance), you may also be eligible for the Starting Rate for Savings, which can make up to an additional £5,000 of interest tax-free.
For most people, their interest is well within their £1,000 allowance, so they pay no tax and don't need to do anything.
3. The 3 Scenarios: When Do I Need to Act?
Your action depends on two things: 1) if you already file a tax return, and 2) the amount of interest you earn.
Scenario 1: You ALREADY file a Self Assessment tax return.
(e.g., for self-employment, rental income, or high income)
This is the most important rule.
You MUST include all of your savings interest on your tax return.
It doesn't matter if the interest is £50 and well below your tax-free Personal Savings Allowance. If you are required to submit a Self Assessment for any other reason, you must declare all your untaxed interest on the "Interest and dividends" section (Page TR3 of the main SA100 form).
The tax return will then use your PSA to calculate any tax due, but the income must be reported.
Scenario 2: You do NOT file Self Assessment, and your interest is UNDER £10,000.
This is the most common situation.
You do NOT need to register for Self Assessment.
If your total savings interest is over your tax-free allowance (e.g., you're a basic-rate taxpayer and earn £1,200 in interest) but less than £10,000, HMRC will handle it.
They will automatically collect the tax you owe (on the £200) by adjusting your PAYE tax code.
How does this work? HMRC uses the data from your bank. They will estimate your interest for the coming year (often based on last year's data) and reduce your tax-free Personal Allowance. This means you'll pay a little more tax on your wages or pension each month to cover the tax on your savings.
You should see this adjustment on your P2 tax code notice. It's vital to check this notice to ensure the estimated interest amount is correct.
- Source: GOV.UK - Tax on savings interest
Scenario 3: Your interest income is OVER £10,000.
This is the key threshold.
You MUST register for and file a Self Assessment tax return.
If your total income from savings and investments is over £10,000 for the tax year, you are required to report it through Self Assessment. This is true even if you don't normally file one and don't have any tax to pay.
Summary: What Should I Do?
Final Check
- Check Your PSA: Are you a basic, higher, or additional rate taxpayer? This tells you if your allowance is £1,000, £500, or £0.
- Total Your Interest: Add up all interest from all accounts (including joint accounts, where you're taxed on your 50% share).
- Check the £10,000 Rule: Is your total interest over this limit?
- Check Your Tax Code: Look out for your PAYE code notice (a P2) and check that the "untaxed interest" figure is reasonably accurate. If it's wildly wrong, you should contact HMRC to correct it.
