HM Revenue & Customs (HMRC) is sending UK households tax bills based on the gross amount of savings interest, even when early withdrawal penalties drastically reduce the actual interest received. A pensioner couple from the East Midlands shared their frustrating experience after falling victim to this HMRC rule.
The couple sold their London flat, paid off their mortgage, and moved to Nottingham to be closer to their adult children. They rented for a year while searching for a new home to buy outright with cash from the sale and savings, avoiding the need for a mortgage.
When a perfect property became available sooner than expected in July 2024, they had to withdraw funds early from their fixed-term savings accounts. They were aware the bank would levy an early withdrawal charge and factored it into their calculations. According to NatWest’s information, the early closure fee is capped at the lesser of the interest earned or 90 days' interest.
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The penalty applied was £2,691.44, equivalent to 90 days’ interest, deducted from a total interest payment of £2,876.98 earned over four months. This left them with just £185.54 in net interest for the tax year.
However, when they received their tax calculations from HMRC for the 2024-25 tax year, they learned that HMRC had based their tax liability on the gross interest (£2,876.98) rather than the net amount after the penalty. This oversight resulted in a tax bill of £575.40—exceeding the interest they actually received.
Despite numerous phone calls and letters to both HMRC and NatWest, the couple found no resolution. They described the situation as unfair, highlighting a significant flaw in how savings interest is taxed when early withdrawal penalties apply.