Guidance

Appendix A — member guidance for tax on interest

Updated 26 September 2024

If you have received interest on your pension (and lump sum) arrears you may have to take some action. HMRC can confirm that this interest is treated as savings income for the tax year in which you received the interest payment and therefore tax may be due.  

Identify the total amount of interest you have received for the tax year in which you received the payment — step 1

To find the total amount of interest, as well as the interest you have received on your pension (and lump sum) arrears, you should also include any savings income received in respect of interest paid on your UK banks and building societies.

Savings in tax free accounts, for example ISAs, do not need to be included as interest from ISAs is not taxable savings income.

Find further guidance on the tax treatment of interest payments.

Assess whether the total amount of interest you have received for the tax year in which you received the payment exceeds your personal savings allowance — step 2

Most people have an amount of savings income that they can get tax free. This is known as the personal savings allowance:

• if you are a basic rate taxpayer your personal savings allowance is £1,000
• if you are a higher rate taxpayer your personal savings allowance is £500
• if you are an additional rate taxpayer you do not have a personal savings allowance

UK residents

If your total taxable savings income, as established in step 1, is less than your personal savings allowance, you do not need to take any further action. 

If your total taxable savings income, as established in step 1, is more than your personal savings allowance you will need to pay tax on this amount along with your other income.

Non UK residents

You will have had tax deducted at the basic rate.

If your total taxable savings income is less than your personal savings allowance, you may be able to reclaim overpaid tax from HMRC.

If your total taxable savings income is more than your personal savings allowance, you do not need to take any further action in the UK.

In either case you may need to pay or report tax in your country of residence.

How to inform and pay your tax liability to HMRC — step 3

There are three possible routes to follow which depend on whether you ordinarily complete a self-assessment return and how much total savings income you have received. These are as follows:

If you ordinarily complete a self-assessment return

If you ordinarily complete a self-assessment return, you will be asked for information about your savings income as part of this process.

If you do not ordinarily complete a self-assessment return

If you do not ordinarily complete a self-assessment return, and your total savings income is £10,000 or more, you will need to register for self-assessment and file a self-assessment return.

If you do not ordinarily complete a self-assessment return and your total savings income is less than £10,000, you will need to tell HMRC about the income.

You will need to set out the amount of interest received on your pension (and lump sum) arrears and confirm:

• that no tax was deducted from the interest
• the interest related to the pension (and lump sum) arrears
• the tax year the interest was paid in
• the interest was a one-off payment (and not, for example, a recurring payment)

Find guidance on how the public service pensions remedy affects your tax position.