HMRC update over £10,000 tax rule that applies to anyone with a savings account

HMRC has explained some of the rules around tax on savings. A taxpayer asked the group on social media what happens if a person needs to pay tax on their interest earnings. They asked specifically if you need to notify HMRC and complete a tax return, or if your tax code will be adjusted automatically.

The tax agency responded by saying: "If your income from savings is more than £10,000, it will need to be declared in self assessment, and if it is less than that, you will need to declare it in PAYE." To this the person asked if the total is less than £10,000, how do you declare this through PAYE, and when this would need to be declared.

HMRC shared some more guidance in response. They said: "You can use your personal allowance to earn tax-free interest if you have not used it up on your wages, pension or other income. You may also get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings."

The personal allowance means you can earn up to £12,570 a year without paying income tax. The starting rate for savings allows you to earn up to £5,000 a year in interest tax-free, but this is reduced once your earnings go above the personal allowance.

For each £1 your income is above the allowance, your starting rate drops by £1, meaning once your income reaches £17,570 a year, you get no starting rate.

HMRC explained some of the other rules that apply for savers, saying: "Your bank will usually send you a certificate at the end of the tax year with the amount of interest you have earnt. You can tell us when you know how much you have."

Some other rules to note include that those on the basic rate for income tax can earn up to £1,000 in interest tax-free. Those on the higher rate can earn up to £500 tax-free while those on the additional rate get no allowance.

You can avoid tax altogether by savings into ISAs, as any interest earnings or investment growth within these accounts is entirely tax-free. You can deposit up to £20,000 each tax year into ISAs, and this allowance can be split between cash ISAs and stocks and shares ISAs.

The Bank of England dropped the base interest rate from 4.25 percent down to 4 percent in August. Many savings providers drop their rates when the base rate falls. The next decision on the base rate will come out on September 18.