How does HMRC collect tax on savings interest in the UK?

Full answer

UK banks, building societies and NS&I automatically report interest paid to HMRC under the **Common Reporting Standard (CRS)** — a global information-sharing framework. HMRC uses this data to calculate whether you owe tax on savings interest above your **Personal Savings Allowance (PSA)**. **Step 1 — HMRC receives interest data:** All UK financial institutions submit annual interest figures to HMRC after the tax year ends. HMRC matches this data to your National Insurance number. **Step 2 — Tax code adjustment (most common route):** For PAYE employees and pensioners, HMRC simply adjusts your tax code for the following tax year — reducing your code by the amount of taxable savings interest, so your employer deducts extra tax from salary or pension. For example, if you earned £300 of taxable savings interest (above your PSA), HMRC would reduce your tax code by 300, collecting £60 extra tax (at 20%) across the year. **Step 3 — Self Assessment (for larger amounts or SA taxpayers):** If the tax owed on savings interest exceeds £1,000, or you are already registered for Self Assessment (e.g. self-employed, director, landlord), HMRC will ask you to declare interest on your **SA100 return** and pay via the SA payment deadline (31 January following the tax year). **Reclaiming over-deducted tax — R40 form:** Non-taxpayers (whose total income is below the Personal Allowance) can use **Form R40** to reclaim any tax deducted in error. You can claim up to **4 years** back. If you expect to be a non-taxpayer in the current year, you can complete an **R85** form with your bank to receive interest gross going forward. **ISA interest — completely exempt:** Interest earned inside an ISA does not count toward the PSA, is not reported to HMRC for tax purposes, and never appears in tax code calculations.

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