HMRC sent tax demand for my fixed savings account – even though I won’t be paid

I took out a fixed-rate savings deal for three years with a bank. The interest is calculated annually by the bank, but won’t be paid out to me until the account matures.

I let the bank report the interest to HM Revenue and Customs for tax purposes as I don’t have any obligation to notify it myself.

I then received a tax demand from HMRC for the interest accrued in the 2023/24 tax year, even though the bond is not due to mature until later.

In my case, it means paying out £1,300 years before this tax is due – and the same might happen again next year. 

I am also worried that, at the end of the three-year period when I am actually paid the interest, HMRC may end up taxing me again, for the whole amount. 

To HMRC’s credit, it told me to just write in and explain, but it shouldn’t be for taxpayers to sort out the tax system. 

Surely more people will be experiencing this issue due to the increase in savings rates in recent years, and fiscal drag moving people into higher tax bands.

Ed Magnus of This is Money replies: You’re unlikely to be the only saver with questions about the tax they must pay on interest.

As of October 2024, an estimated 6.1 million savings accounts could be liable for tax, according to new analysis by Shawbrook Bank.

That’s up from just 147,000 savings accounts in October 2021.

The personal savings allowance means basic rate taxpayers can earn £1,000 of interest from their savings each year tax free, but this is slashed to £500 for higher rate taxpayers (earning over £50,270) and is zero for those paying the top rate of tax.

You raise an interesting question about when exactly this tax is due on savings interest.

Fixed rate savings deals will either pay interest monthly, annually or on maturity – when the fixed term ends.

If the fixed rate deal you are using pays interest annually into a nominated bank account, then they will be liable to pay tax in each given year they receive interest.

However, if the fixed rate deal – whether it be two-year, three years or longer – pays out the interest only at maturity, then HMRC states you only need to declare it for the tax year their account matures in.

This seems to be the case where you are concerned, as you can’t draw on the interest you have accrued so far.

HMRC states on its website: ‘Interest “arises” when it is received or made available to the recipient. Interest has been made available if it is credited to an account on which the account holder is free to draw.’

If the interest had been paid to you, for example to a separate bank account, you would have to declare it.  

Banks and building societies notify HMRC of interest received, but a saver should only be required to submit a tax return if the total interest (excluding interest from their Isa) was over £1,000 in a given tax year. 

HMRC says it is the taxpayers’ responsibility to check their tax coding or simple assessment tax return to make sure they are correct. 

If a taxpayer thinks the figure for investment income included in their tax coding or simple assessment is incorrect, they should contact HMRC either in writing, by telephoning, or by notifying HMRC via their personal tax account. 

HMRC will then check the position and make any adjustment to a person’s tax coding or simple assessment.

For expert advice on the matter, we spoke to James Blower, founder of The Savings Guru and Anna Bowes, from the wealth management firm, The Private Office. We also contacted HMRC.

An HMRC spokesperson replies: Tax is charged on interest arising in the tax year. 

If interest is credited to a bondholder’s account but the bondholder can’t access the funds until maturity, then the interest arises, and is taxable, at the maturity of the bond.

James Blower replies: The question is clearly around tax liability on interest on longer-term fixed rate bonds, and the accessibility of any interest being earned from the bond.

If a saver has a three-year bond, but the interest is added to it and cannot be withdrawn or paid on maturity, then the tax liability will become due at maturity. 

Take the example of someone taking out a three-year bond today, which would mature on 31 January 2028. 

They will be liable for tax on the full interest paid out on maturity, on their 2027/28 tax return, but nothing should be taxed in any of the 2024/25, 25/26 or 26/27 tax years.

Savings providers have to declare when and how interest is paid to savers when they open accounts, so they are aware of this upfront. However, there will…