Introduction
Money doesn’t just sit in a bank. It grows, even if only a little. When you earn interest from your savings, the government sees it as income. And like any other income, it may be taxable. Many people don’t realize that interest on savings should be included in a tax return.
Now, add another layer. What if you’re also a landlord? Then your self assessment becomes even more complex. The tax return interest on savings goes alongside your rental profits. Both must be declared properly, or HMRC could come knocking.
This guide breaks down everything you need to know.
Why Does HMRC Tax Interest on Savings?
Savings interest may look small, but across millions of accounts, it adds up. HMRC sees it as unearned income—like dividends or rental profits. If you cross certain thresholds, you need to report it.
-
Personal Savings Allowance (PSA):
-
Basic-rate taxpayers: £1,000 allowance
-
Higher-rate taxpayers: £500 allowance
-
Additional-rate taxpayers: £0 allowance
-
-
Savings Starting Rate:
Up to £5,000 for low earners (applies if other income is under £17,570).
So, if your savings interest stays within these limits, you may pay nothing. But once you go beyond, tax applies.
How to Report Tax Return Interest on Savings
Most people don’t file anything if their interest is small. Banks now report interest directly to HMRC. But if you’re self-employed, a landlord, or already under self assessment, you must include it yourself.
Steps:
-
Log into your HMRC self assessment portal.
-
Go to the “UK Interest” section.
-
Enter the gross amount (before tax deductions).
-
Submit along with your other income sources.
It’s simple but easy to overlook.
Story: A Common Mistake
Take Martin, a landlord in Manchester. He filed his landlord self assessment tax return regularly. But he forgot about £2,200 interest earned on fixed deposits. Three years later, HMRC flagged it during a compliance check. The result? £680 extra tax plus a penalty for not declaring.
Lesson: Always include savings interest, even if small.
Interaction Between Savings Interest and Rental Income
Both incomes sit together under self assessment. Here’s how they interact:
-
Rental income: taxed after deducting expenses (repairs, letting fees, insurance).
-
Savings interest: added on top of net rental profit.
-
Combined total: pushes you into higher brackets if thresholds are crossed.
Example:
-
Rental income profit: £25,000
-
Savings interest: £2,500
-
Total taxable income: £27,500
This may shift you from basic to higher-rate tax if you were already near the threshold.
Landlord Self Assessment Tax Return Explained
If you rent out a property, you must declare your earnings. Even if you think, “I only made £3,000 after mortgage payments,” HMRC wants the figures.
What to include in a landlord self assessment tax return:
-
Rental income received
-
Allowable expenses (repairs, agent fees, utilities if paid by you)
-
Capital allowances (in some cases)
-
Interest on buy-to-let mortgages (with restrictions)
Failure to file accurately could mean penalties.
Savings Interest Complications for Landlords
When you combine savings and rental income, things get trickier:
-
Mortgage interest relief is limited (since 2020, replaced with 20% tax credit).
-
Rental profits might push you into higher tax rate.
-
That reduces your Personal Savings Allowance.
So, landlords often end up paying more on savings interest than someone with the same savings but no rental income.
Who Must File for Tax Return Interest on Savings?
-
People earning more than £10,000 from dividends or savings combined.
-
Landlords with additional income.
-
High earners already under self assessment.
-
Anyone receiving interest from abroad.
If you fall under these groups, self assessment is mandatory.
Tips to Minimize Tax on Savings Interest
You can’t avoid taxes, but you can plan smartly:
-
Use ISAs (Individual Savings Accounts): Interest earned here is tax-free.
-
Spread savings with a partner: Double allowances.
-
Track interest regularly: Avoid underreporting.
-
Offset with expenses if you’re a landlord: Every penny claimed reduces taxable rental profits.
Example Breakdown
Sarah earns:
-
£20,000 salary
-
£7,000 rental profits
-
£1,800 savings interest
Her PSA is £1,000 (basic rate taxpayer). So, £800 interest is taxable. Added to her income, she pays 20% on it = £160 extra tax.
Not huge, but worth knowing.
Penalties for Not Declaring Interest on Savings
HMRC penalties can sting:
-
Late filing: £100 minimum fine
-
Failure to notify: Up to 30% of unpaid tax
-
Deliberate evasion: 70% or more
That’s why accuracy is key.
Linking Savings Interest to Landlord Obligations
Landlords are already under HMRC’s radar due to the property income crackdown. Failing to declare savings interest only worsens the situation. HMRC cross-checks:
-
Bank interest reports
-
Land registry data
-
Mortgage records
If there’s a mismatch, expect letters.
Common Questions
Do I need to declare if my interest is under £1,000?
Yes, if you already file self assessment. HMRC wants the total figure, even if tax due is zero.
What if my bank already reported it?
You still include it. HMRC matches both entries.
Does ISA interest count?
No. ISAs are exempt.
Best Practices for Landlords with Savings
-
Keep a separate savings account for rental reserves.
-
Track monthly interest instead of waiting until year-end.
-
Store bank statements for at least six years.
-
Work with an accountant if both rental and savings income are significant.
Future of Savings Interest Taxation
HMRC is moving toward greater digital reporting. With “Making Tax Digital” rolling out, soon you may need to update quarterly, not yearly. That means landlords and savers alike will face tighter compliance.
Conclusion
The tax return interest on savings may look like a small detail, but it can change your overall liability. For landlords, it connects directly with the landlord self assessment tax return. Forgetting to declare interest can lead to penalties and unwanted attention from HMRC.
Stay proactive. Keep records. Understand allowances. And if numbers overwhelm you, seek professional help. It’s far better than dealing with fines later.
