In a fixed-term savings account of more than a one-year term, interest is usually credited annually and not withdrawn until the end of the fixed term.

When should the interest be declared for tax?

If declared annually it might not exceed the new £1,000 personal savings  allowance (PSA), but if declared as one final amount the annual allowance could be exceeded and some benefit lost.

AW, email

Since April 6, basic rate taxpayers can earn £1,000 interest each year before being taxed and higher-rate taxpayers have a £500 allowance. As fixed term savings accounts can pay interest monthly, annually or on maturity, lots of readers have contacted Telegraph Money confused as to how it will impact their PSA.  

According to HMRC, it does not matter when the interest is credited to your account. Rather, it boils down to when the interest is made available  or when it becomes free to withdraw. This is an important feature of fixed term savings accounts as not all permit access. 

In a bid to improve its scant communications on the imminent changes, HMRC has issued a policy paper outlining details of the new tax-free personal savings allowance (PSA) to be introduced for savings income, such as interest, paid to individuals.

Under the new rules basic rate tax payers will be able to receive up to £1,000 of savings income, and higher rate taxpayers can receive up to £500 of savings income, without any tax being due. The PSA will not be available to any saver with additional rate income. Alongside the introduction of the PSA, banks, building societies and NSamp;I will cease to deduct tax from account interest they pay to customers.

HMRC calculates that around 18m savers will benefit from a tax reduction on their savings income, on average by £25 each year. It is anticipated that around 95% of taxpayers will not have any tax to pay on their savings income.

Around one million individuals are expected to still have tax to pay on their savings income after the PSA has been introduced. Most will be additional rate taxpayers or individuals with higher than average savings. For example, with an interest rate of 2% a basic rate taxpayer would need to have around £50,000 of non-ISA savings before they have any tax to pay on their interest.

Legislation will be introduced in Finance Bill 2016 to amend the Income Tax Act 2007 (ITA) and introduce a new 0% rate (the 'savings nil rate') for savings income received by individuals. This new nil rate will apply to savings income within an individual's 'savings allowance'.

An individual's savings allowance in a tax year will be £1,000, except where either: they have 'higher rate income' but no 'additional rate income' in the year (in which case their allowance will be £500); or they have any additional rate income in the year (in which case their allowance will be nil).

Income from an ISA, and income which qualifies for the 0% starting rate for savings at section 12 of ITA, will not use up any part of an individual's savings allowance.

Income that is within an individual's savings allowance will still count towards their basic or higher rate limits - and may therefore affect the level of savings allowance they are entitled to, and the rate of tax that is due on any savings income they receive in excess of this allowance.

Alongside this new savings nil rate, deposit-takers, building societies and NSamp;I will no longer be required to deduct sums representing income tax from account interest they pay to customers.

Individuals who are unlikely to have tax to pay on their bank or building society interest will therefore no longer have to register with their account provider to have this interest paid without deduction.

According to HMRC's own analysis, the introduction of the new savings allowance will see a £1.32bn drop in tax receipts in 2015/16, levelling off to a reduction in the tax take of between £565m and £675m each year up to 2019/20. 

In the policy paper, HMRC says this may feed through to higher consumption or savings in the household sector.

The HMRC personal savings allowance policy paper is here

Savers have had little to cheer about since 2009 with interest rates evaporating before their eyes. 

But now there are good tidings at last - if not on rates, at least on protecting dwindling returns from tax.

Since April 6, all bar additional-rate taxpayers will be given a personal savings allowance, worth £1,000 to basic rate taxpayers and £500 to those paying the higher rate. It means millions of savers will be up to £200 a year better off.

The interest can come from money held in current accounts, National Savings and Investments products, peer-to-peer loans, corporate bonds and gilts - not just savings accounts.

Basic-rate taxpayers can then receive £1,000 tax-free under the new personal savings allowance. Higher-rate, 40 per cent taxpayers get £500 and top-rate 45 per cent taxpayers get nothing.

If you owe tax on earnings above this level, you have to pay it. But thats where it gets messy.

Though with NSamp;I you cant touch your money for three years - unless you pay a stiff penalty - it adds interest to your account each year. And it immediately becomes liable to tax.

An NSamp;I spokesman told Money Mail: The liability for tax will arise when the interest is added to the account, regard-less of the fact customers may not cash in until the end of the term.

If you put the full £10,000 into the account, you will earn £400 interest before tax in the first year.

As a basic-rate taxpayer, you could owe £80 tax, depending on whether you have savings interest from other accounts on top.

In year two, your return rises to £416 (4 per cent on £10,000 plus the £400 interest added to the account), giving a tax bill of £83.20.

In the third year, your interest is £432 with £86 tax due. But at least by this time, you will have got your money back.