Savings And Investment Income Appeals: Tax On Interest And Dividends

A letter has arrived from HMRC saying you owe tax on your savings interest or your dividends. Perhaps it is a calculation showing your bank paid you more interest than your allowance covers. Perhaps it taxes dividends you thought were too small to count. Perhaps you have been told the ISA you opened in good faith is "not valid," so the income you believed was tax-free is now taxable after all.

Take a breath. The most common reaction to this letter is, "I have never had to do anything about my savings before—why now?" That feeling is entirely reasonable, and there is a straightforward explanation for it.

This guide does three things. It explains why these bills started landing, so the letter stops feeling like an accusation. It walks through the allowances and rates—which are date-sensitive and often misapplied, by HMRC and taxpayers alike—so you can check whether the figure is even right. And it shows you the correct way to challenge each kind of letter, because the worst mistake here is treating a formal, appealable assessment as if it were just a wrong tax code—missing the deadline, and losing the right to put it right.

HMRC Says I Owe Tax On My Savings—What Is This Letter?

Before anything else, work out which of three very different things you are holding, because the right response to each is completely different.

A P800 tax calculation is HMRC's informal, end-of-year reconciliation. After the tax year closes, HMRC adds up what your tax code collected through PAYE and compares it with what its records say you should have paid—including the interest your bank reported. If those do not match, you get a P800. A P800 is not a formal assessment, and not itself something you "appeal." It is a starting point to check. If the figures are wrong, you query them with HMRC—there is, as yet, no formal demand to appeal against.

A Simple Assessment (you may see it as a PA302) is the formal version. Here HMRC uses information it already holds to make a binding assessment of the tax you owe (section 28H TMA 1970), without making you file a full tax return. This one carries real deadlines and real appeal rights—and that is exactly why it must not be confused with a P800 or a tax code.

A tax-code change is different again. If HMRC adjusts your code to start collecting tax on estimated future interest, that is an administrative act, not an assessment. There is no appeal to the tribunal against a tax code. You fix it by contacting HMRC or using your Personal Tax Account. We come back to this important limit below.

Why This Is Happening Now

The reason these letters started arriving is a single change in April 2016. Before then, banks and building societies took 20% tax off your interest at source before paying it to you—so for most people the tax was already handled and there was nothing to declare.

Schedule 6 to the Finance Act 2016 abolished that scheme from 6 April 2016. Since then, almost all bank and building-society interest is paid gross—with no tax taken off. The same reforms introduced the Personal Savings Allowance, so the large majority of savers still pay nothing. But for those who do owe—higher earners, or anyone with interest above their allowance—nothing is now collected at source, and most have never filed a return. So HMRC collects it after the year end: banks report your interest, and HMRC issues a P800 or a Simple Assessment.

That is the whole story behind "why now." Nothing has gone wrong on your side. The collection method changed, and the bill simply arrives later, in a less familiar form.

How Savings And Investment Income Is Taxed

The basic charging rules are short, and worth knowing so the rest makes sense.

Interest is taxed as income under section 369 ITTOIA 2005—"income tax is charged on interest." It catches interest from banks, building societies, credit unions, National Savings products that are not specifically exempt, company loan stock, and peer-to-peer lending. The person taxed is the one entitled to the interest—the beneficial owner of the account or the loan.

There is no statutory definition of "interest"; what counts is settled by case law, which HMRC summarises in its Savings and Investment Manual at SAIM2400. The long-standing principle is that interest "arises," and so becomes taxable, once it has swelled your assets—even if it is credited to an account you cannot yet draw on, such as a fixed-term bond.

Dividends from UK companies are taxed under section 383 ITTOIA 2005, which charges income tax on "dividends and other distributions of a UK resident company." A point that catches people out: a "dividend" from a building society is actually taxed as interest, while a true company dividend follows the dividend rules below. They carry different allowances and different rates, so it matters which is which—do not be thrown if your building-society return appears on the interest line.

Foreign interest and dividends—from an overseas bank, platform or company—are still taxable in the UK if you are UK resident, and they bring their own complications, including longer assessment time limits. If your letter concerns income held or arising offshore, read our guide to offshore disclosure and penalties alongside this one. Income from crypto staking, lending or similar arrangements has its own treatment—see crypto tax appeals—and investment income held inside a pension wrapper is taxed differently again (pensions tax appeals).

The Allowances And Rates—And Why You (Or HMRC) May Have Got Them Wrong

This is the heart of the matter, and the single most common place a savings or dividend assessment goes wrong. The allowances and rates are date-sensitive: the right figure depends entirely on the tax year HMRC is assessing. Get the year wrong and the bill is wrong.

One structural point explains a frequent error. The charges on interest and dividends sit in ITTOIA 2005 (above); the allowances and rates sit in a different Act, the Income Tax Act 2007. Keeping the two apart is half the battle.

The Personal Savings Allowance

The Personal Savings Allowance—technically the "savings nil rate"—lets a slice of your savings interest be taxed at 0% (section 12B ITA 2007). The amount depends on your top tax rate:

• Basic-rate taxpayer: £1,000
• Higher-rate taxpayer: £500
• Additional-rate taxpayer: £0

These figures have been the same since the allowance began in 2016-17. The trap is what the allowance is: it is a nil-rate band, not a deduction. The first £1,000 (or £500) of interest is taxed at 0%, but the income still counts towards working out which tax band you are in—and it still counts towards your adjusted net income for charges like the High Income Child Benefit Charge. A pound of "tax-free" interest is not an invisible pound.

The Starting Rate For Savings

There is a second 0% band for savings: the starting rate for savings, with a limit of £5,000 (section 12 ITA 2007). But this one only helps people whose other income—earnings or pension—is low.

Here is the mechanism. The £5,000 band is reduced pound for pound by any non-savings income above your personal allowance. So if your earnings or pension exceed the personal allowance by £5,000 or more, the starting-rate band is £0. A pensioner with a small pension and large savings may get most of the band; a salaried worker almost never gets any of it.

Whether the starting-rate band applies to you is therefore a pure question of arithmetic, not choice—and it is the allowance most often wrongly worked out. If HMRC's Simple Assessment for a low-income year has ignored a starting-rate band you were entitled to, the arithmetic is a clean ground on which to query the figure.

The Dividend Allowance

Dividends have their own nil-rate band, the dividend allowance, currently £500 (section 13A ITA 2007). The first £500 of dividend income is taxed at 0%.

This figure has fallen sharply, and that matters enormously if HMRC is assessing an earlier year. The trail is:

The £500 allowance holds for 2025-26 and 2026-27. Dividends that a £2,000 allowance covered in full in 2022-23 are mostly taxable in 2024-25. If you are checking a multi-year assessment, read the year on each line and apply the allowance for that year, not today's.

The Dividend Rates—The Date Trap To Watch

Dividends above the allowance are taxed at their own rates, and these are changing. For 2024-25 and 2025-26, the rates are:

• Ordinary rate (basic-rate band): 8.75%
• Upper rate (higher-rate band): 33.75%
• Additional rate: 39.35%

From 6 April 2026 (the 2026-27 tax year), Finance Act 2026 raised the ordinary and upper rates by two points: the ordinary rate becomes 10.75% and the upper rate 35.75%. The additional rate stays at 39.35%.

This is the most important date trap on the page. The current text of the legislation already shows the 2026-27 figures, so it is easy to apply 10.75% to a 2025-26 assessment by mistake—or the reverse. Every dividend rate must be paired with its tax year. If your assessment uses 10.75% on dividends from 2025-26 or earlier, the rate is wrong.

A Decoder Table By Tax Year

Pulling the key figures together. Always read across the row for the year HMRC is assessing:

The savings allowances have held steady; the dividend allowance fell and the dividend rates rise from 2026-27. Most genuine "you've got the figure wrong" arguments live in those two columns.

A Worked Example—How The Allowances Stack

The allowances apply in a set order: your income is taxed non-savings first (earnings and pension), then savings interest, then dividends, and each nil-rate band only shelters its own slice. A worked example shows how that plays out.

Take Tom in 2025-26. His salary is £60,000, and on top he has £1,200 of savings interest and £2,000 of dividends.

• Because his salary alone already makes him a higher-rate taxpayer, his Personal Savings Allowance is £500 (not £1,000), and the £5,000 starting-rate band is nil—his non-savings income is far more than £5,000 above the personal allowance.
• Interest: the first £500 is taxed at 0% (the PSA); the remaining £700 is taxed at the higher savings rate of 40% = £280.
• Dividends: the first £500 is covered by the dividend allowance at 0%; the remaining £1,500 is taxed at the dividend upper rate of 33.75% = £506.25.

So on £3,200 of investment income Tom pays about £786, even though £1,000 of it was "allowance-covered." Contrast a pensioner with a £14,000 pension and £4,000 of interest: their non-savings income is only about £1,400 over the personal allowance, so most of the £5,000 starting-rate band survives, and the interest is largely taxed at 0%. Same allowances, completely different result—which is why the worked arithmetic, year by year, is what decides whether HMRC's figure is right.

Simple Assessments And P800s—The Right Way To Challenge Them

Now the mechanics. The route depends on which document you have.

If you have a P800, there is nothing to formally appeal yet—you query it. Phone or write to HMRC, explain which figures are wrong (the most common errors are interest double-counted, interest attributed to the wrong person on a joint account, or an allowance not applied), and ask HMRC to correct it. Do this promptly, before the underpayment is coded out or formalised into something that does carry appeal rights.

How to check HMRC's interest figure. HMRC's interest number comes from the annual returns banks and building societies make to it—one figure per account, after the year end—so it can be checked. Gather your own records: the annual interest certificate or statement each provider issues (usually downloadable from online banking), and add up the gross interest credited in the tax year, which runs 6 April to 5 April. Compare your total with HMRC's. The usual discrepancies are interest from a joint account counted in full instead of split between the holders, a closed or transferred account double-counted, an ISA's (tax-free) interest wrongly included, or interest on a fixed-term bond attributed to the wrong year. Where your figure and HMRC's differ, the provider's certificate is your evidence—keep it.

If you have a Simple Assessment, there is a clear two-stage sequence, and the deadlines are real.

1. Query it within 60 days. Under section 31AA TMA 1970, once you are given notice of a Simple Assessment you may tell HMRC it "is or may be incorrect," with your reasons, within 60 days of the date the notice was issued (HMRC can allow longer). HMRC must then give a final response: confirm the assessment, issue an amended one, or withdraw it.
2. Appeal the final response within 30 days. A Simple Assessment becomes formally appealable under section 31 TMA 1970 only after you have raised that query and received the final response. You then have 30 days to give notice of appeal in writing (section 31A TMA 1970).

From the appeal, the usual options open up. You can ask for a free HMRC statutory review by a different officer, completed within 45 days, and—review or not—you can take the appeal to the First-tier Tribunal. On the amount of an assessment, the burden of proof is on you to show it is excessive (section 50(6) TMA 1970), so your bank statements, dividend vouchers and arithmetic do the heavy lifting—our guide to writing grounds of appeal shows how to set them out.

If you missed the 30 days window, a late appeal is still possible, but the tribunal applies a strict test—see our analysis of Martland v HMRC.

Phone or in writing—pick the right channel. For a straightforward P800 query, or to correct a tax code, a call to HMRC's income-tax helpline (0300 200 3300) or a message through your Personal Tax Account is usually quickest; note the date, time and the adviser's name. But anything tied to a deadline—querying a Simple Assessment within 60 days, or giving notice of appeal within 30 days—should go in writing (a letter or the relevant online form), so you have dated proof you met the clock. If in doubt, put it in writing.

Remember the tax keeps accruing interest. Whatever you dispute, any tax that is ultimately found due carries interest from the date it should have been paid until you pay it. Interest is automatic and is not a penalty, so it runs even where the disagreement was entirely reasonable. The practical consequence: if you accept part of HMRC's figure, paying that part promptly stops interest building up on it, even while you challenge the rest. For a larger assessment you may also be able to ask HMRC to hold over payment of the disputed tax until the appeal is decided—see postponing payment during an appeal.

The Tax-Code Limit You Cannot Cross

Here is the single most important boundary, because a large share of "savings tax" complaints are really complaints about a tax code—and the tribunal cannot touch those.

If HMRC has changed your code to collect estimated interest, or carried last year's interest figure forward into this year's code, that is administration of PAYE, not an assessment. The First-tier Tribunal is a creature of statute with no general "fairness" or judicial-review power, so there is no appeal against a coding notice.

You correct a wrong code by contacting HMRC or through your Personal Tax Account; if that fails, the route is complaint, then the Adjudicator. The tribunal can only hear an appeal against the assessment that eventually crystallises the tax, or against a penalty—never against how HMRC runs your code. This is the limit our analysis of Hok v HMRC explains. Aim your challenge at the assessment, not the code.

ISAs—When HMRC Says Your "Tax-Free" Account Isn't

An ISA shelters its income and gains from tax, which is why being told your ISA is "invalid" is so unwelcome: the income you thought was tax-free becomes taxable, and HMRC may collect the tax due.

The annual subscription limit is £20,000 (regulation 4ZA of the Individual Savings Account Regulations 1998). The most common ways an ISA falls foul of the rules are:

• Subscribing more than £20,000 across your ISAs in a single tax year.
• Opening two ISAs of the same type in the same year before the rules relaxed. From 6 April 2024 you may pay into multiple ISAs of the same type, so this is mostly a dispute about earlier years.
• Subscribing while not UK resident, or holding non-qualifying investments in the account.

When an ISA breaches the rules, the default consequence is voiding: the tax-free wrapper is removed and the income or gains become taxable. But for some breaches—typically an honest over-subscription—HMRC may instead repair the account under regulation 4A, which broadly puts you back where you would have been. Repair is not available for fundamental breaches: where the saver was non-resident when they subscribed, was under age, or the account held non-qualifying investments, the account must be voided.

HMRC's correction usually arrives as a Simple Assessment or a discovery assessment taxing the now-non-exempt income, which you challenge by the query-and-appeal route above. The substantive dispute, though, is almost always factual: did you in fact exceed the £20,000 limit; were you actually non-resident; was the investment genuinely non-qualifying? Whether there was a breach at all is squarely a matter the tribunal can decide. Whether HMRC then chooses to repair rather than void is largely an administrative matter—the Hok limit again.

One reassurance for the worried reader: valid ISA income does not count towards your Personal Savings Allowance or dividend allowance, and you do not have to declare it. If your ISA is in order, it stays invisible to your tax bill.

The Niche Traps—Accrued Income Scheme And Peer-To-Peer

Two less common scenarios are worth a short word, because when they bite they surprise people.

The Accrued Income Scheme

If you have bought or sold gilts or corporate bonds, watch for the Accrued Income Scheme. When you sell a bond between interest payment dates, the price you receive includes a slice of interest that has built up but not yet been paid. Without a special rule you could turn that interest into a capital receipt. The scheme stops that: it taxes the seller on the accrued interest, as income, under section 616 ITA 2007—"income tax is charged on accrued income profits." (This charge lives in the Income Tax Act 2007, not ITTOIA.)

So someone who sold, say, £50,000 of corporate bonds "with interest" can face an unexpected income-tax charge on the accrued-interest element, even though they thought they had only made a capital disposal.

The reassuring part: the scheme does not apply if the nominal value of all your relevant securities stayed at or below £5,000 throughout the tax year and the previous one. Most ordinary savers are comfortably outside it—only an active bond or gilt trader needs the detail. HMRC's overview is at SAIM4000.

Peer-To-Peer Lending

Interest from a peer-to-peer lending platform is taxable interest, paid gross like bank interest. The grievance readers usually have is being taxed on interest from a loan the borrower then defaulted on—so they paid tax on the interest and lost their capital.

There is relief, but it is narrow. Under section 412A ITA 2007, if a peer-to-peer loan made through a platform becomes irrecoverable (on or after 6 April 2015), you can deduct the outstanding lost amount—but only against interest from the same and certain related peer-to-peer loans. It cannot shelter your bank interest, dividends or earnings. So a lender who lost £10,000 of capital but earned only £400 of peer-to-peer interest that year can relieve only £400, carrying the rest forward against future peer-to-peer interest. If a letter is taxing peer-to-peer interest and you have defaulted loans, the question is whether this ring-fenced relief has been correctly applied.

If There's A Penalty—Failure To Notify And Reasonable Excuse

So far this is about tax. But where you had untaxed interest or dividends, were not in Self Assessment, and did not tell HMRC, there may also be a penalty.

The duty is in section 7 TMA 1970: if you are liable to tax for a year and are not already within Self Assessment, you must notify HMRC of your chargeability by 5 October after the end of that tax year. Failing to do so can attract a failure-to-notify penalty under Schedule 41 to the Finance Act 2008.

The size of the penalty is driven by your behaviour and your disclosure. The maximum is 30% of the unpaid tax for a non-deliberate failure, 70% for deliberate, and 100% for deliberate and concealed—each reduced, often substantially, the more promptly and fully you put things right. For most savings cases the behaviour is non-deliberate: you simply did not know that gross interest above your allowance had to be notified. How those bands and reductions work is set out in our guides to self-assessment penalties and reducing HMRC penalties.

A penalty can also be cancelled entirely if you had a reasonable excuse for the failure—a defence that applies to the penalty, not the tax. Genuine, objectively reasonable ignorance of an obligation can qualify, depending on the facts. The tribunal works through the Upper Tribunal's four-step framework, which we cover in our analyses of what counts as a reasonable excuse and Perrin v HMRC. If your savings letter comes with a penalty, that is the body of law to read next.

A penalty is appealed separately from the tax, on the same 30 days timetable. You can dispute the tax, the penalty, or both.

What To Do Now

1. Identify the document. Is it a P800 (query it—nothing to appeal yet), a Simple Assessment (formal: 60 days to query, then 30 days to appeal), or a tax-code change (fix it administratively—the tribunal cannot help)? Everything else follows from this.
2. Check the figures against the right tax year. Use the decoder table. Confirm HMRC has applied the correct Personal Savings Allowance, any starting-rate band you were entitled to, the dividend allowance for that year, and the dividend rate for that year—not today's.
3. Watch the joint-account and ownership points. Interest on a joint account is normally split; dividends belong to the registered shareholder. If income has been attributed to the wrong person, say so.
4. For an ISA dispute, focus on the facts. Did you actually exceed £20,000, were you really non-resident, was the investment genuinely non-qualifying? The validity question is for the tribunal; ask too whether HMRC could repair rather than void.
5. Meet the deadlines. Query a Simple Assessment within 60 days; appeal the final response within 30 days. A free statutory review within 45 days can resolve many disputes without a hearing, and you keep your tribunal rights.
6. If there is a penalty, treat it separately. Check the behaviour band and disclosure reductions, and consider a reasonable excuse defence.
7. Get help if you are unsure. Free help is available from TaxAid (taxaid.org.uk) and the Low Incomes Tax Reform Group (litrg.org.uk); a Chartered Tax Adviser or accountant can be engaged for a single piece of work.

For the bigger picture of how a savings or dividend dispute fits into the wider process, see understanding your HMRC appeal rights, HMRC enquiries and closure notices (if you filed a return), and discovery assessments (for closed back years).

Key Legislation And Resources

Legislation

• Section 369, ITTOIA 2005—the charge to tax on interest; and section 383—the charge on dividends and other distributions
• Section 12B, ITA 2007—the Personal Savings Allowance (savings nil rate); section 12—the starting rate for savings (£5,000 band)
• Section 13A, ITA 2007—the dividend allowance (dividend nil rate); section 8—the dividend rates (date-sensitive)
• Section 616, ITA 2007—the Accrued Income Scheme charge; section 412A—relief for irrecoverable peer-to-peer loans
• Schedule 6, Finance Act 2016—abolition of tax deduction at source on bank interest (gross interest from 6 April 2016)
• Regulation 4ZA, Individual Savings Account Regulations 1998—the £20,000 ISA subscription limit; regulation 4A—repair of incompatible accounts and excess subscriptions
• Section 28H, TMA 1970—Simple Assessments; section 31AA—the 60-day right to query one
• Section 31, TMA 1970 and section 31A—right of appeal and the 30-day deadline; section 50(6)—burden of proof on the amount
• Section 7, TMA 1970—the duty to notify chargeability by 5 October; Schedule 41, Finance Act 2008—failure-to-notify penalties

GOV.UK And HMRC Guidance

• Tax on savings interest and tax on dividends—the plain-English overviews, including current rates
• Simple Assessment—what it is and how to query it
• Savings and Investment Manual: SAIM2400 (the charge on interest and the meaning of "interest"); SAIM4000 (Accrued Income Scheme); SAIM5000 (dividends and distributions)
• The Savings and Investment Manual home page

On This Site

• Understanding your HMRC appeal rights, how to appeal to the tax tribunal, HMRC internal review and writing grounds of appeal—the appeal machinery
• Hok v HMRC—why you cannot appeal a tax code or ask the tribunal to "be fair"
• Discovery assessments and HMRC enquiries and closure notices—how HMRC reaches back into earlier years
• What is a reasonable excuse?, Perrin v HMRC, self-assessment penalties and reducing HMRC penalties—the penalty leg
• Late appeal to the tax tribunal and Martland v HMRC—if you missed the 30 days
• Interest on unpaid tax and postponing payment during an appeal—what an underpayment costs, and how to hold over disputed tax
• High Income Child Benefit Charge—where savings and dividends push your adjusted net income over a threshold
• Offshore disclosure and penalties (foreign interest and dividends), crypto tax appeals and pensions tax appeals—related investment-income situations

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax adviser, accountant, or solicitor.