Rising interest rates means collecting tax on interest is much more important to HMRC (Image: Getty)
HMRC is planning to look directly into people’s bank accounts to check if interest needs to be charged on savings. Under new rules banks such as HSBC, Barclays, Lloyds, NatWest , Santander and Chase will be told to make information such as National Insurance numbers available.
In an article for the Telegraph Jonathan Athow, director of strategy and policy at HMRC said the aim was to make sure the tax authorities have all the data they need. He wrote: “HMRC is asking financial institutions to provide additional identifiers, such as National Insurance numbers. We also want to modernise how data is submitted and improve timeliness.
“These changes will improve matching rates and reduce the already small number of mismatches. The second change is improving how HMRC communicates with taxpayers about savings income. This means more information included in tax calculations we provide to taxpayers. Specifically, more granular information on the interest received and details on how that data has been used in calculating tax.
“The aim is to give taxpayers greater confidence in the system and make it easier for them to check and understand their tax position. This sets out the different accounts and associated amounts of interest so that people could see the information we have used in working out their tax. We are currently working through plans for how best to integrate this additional data into the communications we share with taxpayers. The image below captures a mock up of the additional information HMRC plans to include in the future.”
He said that an increase in interest rates has let to ‘higher levels of savings income being earned by households and, in turn, a greater amount of taxable interest. This has made the system for identifying and collecting tax on interest more important.”
Mr Athow said the majority of people pay no interest on savings. Basic-rate taxpayers (20%) can earn up to £1,000 in interest tax-free with the Personal Savings Allowance. Higher-rate taxpayers 40% can earn up to £500 in interest tax-free.
Additional-rate taxpayers (45%) do not receive a tax-free allowance. Mr Athow said: “Isas allow interest to be received entirely tax-free. Even where interest is taxable, the personal savings allowance significantly reduces the number of people who pay tax on their savings.
“In total, only around one in six people receiving taxable savings income have any tax to pay on it. HMRC does not rely on taxpayers to report their savings interest for those not in self assessment. Instead, it receives information directly from banks and building societies using established legal powers.”
He said that each year, financial institutions provide HMRC with information on interest-bearing accounts, including the amount of interest paid and details of the account holder. HMRC annually receives more than 100 million records of interest paid from around 300 financial institutions and this is analysed – but he said the changes were to make sure the data was even more accurate for tax reasons.
It comes as it emerged HMRC has raised an extra £13 million from taxpayers after threatening to raid bank accounts. HMRC has been given so-called “direct recovery” powers from the Labour Party government – and can seize cash from people who owe under £1,000.
The powers were confirmed by Labour Party Chancellor Rachel Reeves last year. After the rules were brought back for tax department officials, HMRC has used them 12 times to claim a total of £225,000, which works out at £18,750 per debtor.
After HMRC issued a public warning over the powers, it managed to raise £13m between September last year and the beginning of May.
Under HMRC rules, tax officials can enter bank accounts to seize cash but must ensure £5,000 is left behind for people.
This would allow those affected to still pay any essential bills, and leave them with a pot which they can use to stay afloat amid the Cost of Living.
Nimesh Shah, the chief executive of accountancy firm Blick Rothenberg, said: “I remain unconvinced that this is a sensible tool for HMRC to use, especially at a time when businesses and individuals are struggling with an increased tax burden – as a direct result of government tax changes, so it seems a double blow.”
A HMRC spokesman said: “Most people pay tax on time and in full – but it’s right that we seek to recover tax from the tiny minority who can afford to pay but refuse to.
“More than £13m of tax has already been paid or brought into payment plans for public services due to the deterrent effect of this measure.”