Inflation & Rising Rates Expose HMRC’s Capacity Issues
Over the past several years, a consistent strategy employed by successive governments to boost tax revenue has been the freezing of tax allowances and bands. This approach, coupled with rising inflation that pushes incomes higher, typically results in:
- bring more people into the tax system; and
- make existing taxpayers pay more tax, both in absolute terms and as a proportion of their income.
One frozen allowance causing growing problems is the personal savings allowance (PSA), unchanged since its introduction in 2016:
- For basic rate taxpayers, the PSA is £1,000 per tax year, which means they have no tax to pay on their first £1,000 of interest income.
- For higher rate taxpayers, their tax-free interest under the PSA is £500.
- Additional rate taxpayers do not qualify for a PSA.
Taxpayers Urged to Take Responsibility Amidst HMRC Delays
This surge in taxable interest has overwhelmed HMRC’s systems. The tax authority had intended to use information provided by banks and building societies to calculate the tax due and issue Simple Assessments or adjust tax codes. However, the sheer volume of calculations for the 2023/24 tax year meant that many assessments were not issued until March 2025, well past the usual online filing deadline.
Compounding the problem, HMRC reportedly struggled to match approximately one in five of the 130 million account reports received to individual taxpayer records. As a result, HMRC is now explicitly reminding savers that the ultimate responsibility for paying tax on interest lies with them and urging prompt payment if they haven’t received communication from HMRC.
Looking ahead, a similar situation is highly likely for the recently concluded tax year. Furthermore, with potential restrictions on cash ISAs being considered, the situation could worsen for savers. This serves as a clear warning: taxpayers cannot solely rely on HMRC to manage the tax due on their interest income and must proactively ensure their tax obligations are met.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
Need Help with Tax on Your Interest Income?
If you’re unsure about your tax obligations on interest earned, contact Chartwell Wealth Management today for expert advice tailored to your specific situation.
