With the end of the financial year looming, Brits are being warned to check HMRC rules, as a ‘significant’ number of savers could end up with hefty tax bills due to rising interest rates.
Although you don’t have to pay tax on money you’ve saved, you are taxed on interest earned over a certain amount — and with the fiscal year ending on April 5th, it won’t be long before letters start landing on doorsteps.
What you should expect all depends on the type of account you have and your income tax band.
Here is what you need to know.
How much tax do you pay on bank interest?
Basic rate taxpayers – earning £12,571 to £50,270 annually – are allowed to earn £1,000 a year in tax-free interest, with anything above this amount charged at 20%.
Meanwhile, the personal savings allowance (PSA) for those on the higher rate – with an income of £50,271 to £125,140 each year – is £500, beyond which a 40% tax is incurred.
Then there’s the different type of account: according to Money Saving Expert (MSE), those on the basic rate would need around £20,000 placed in a top easy-access savings account to exceed the allowance at current rates, with the figure for higher rate taxpayers sitting just over £10,000.
However, if you save through a fixed-rate account, which locks your cash away for a set time, the threshold will be far lower.
Because you’re taxed on savings interest in the tax year you can access it, if you opt for a fixed-rate savings account longer than a year where the interest is paid at maturity, all the interest is counted towards the final year’s PSA.
So, higher rate taxpayers with as little as £3,500 on a three-year fixed rate of 5% will go over their allowance, or roughly £7,000 for anyone on the basic rate.
Types of savings interest subject to tax
Your allowance applies to interest from:
- some life insurance contracts
- bank and building society accounts
- savings and credit union accounts
- unit trusts, investment trusts and open-ended investment companies
- peer-to-peer lending
- trust funds
- payment protection insurance (PPI)
- government or company bonds
- life annuity payments
Savings in tax-free accounts like Individual Savings Accounts (ISAs) and some National Savings and Investments accounts do not count towards your allowance.
Visit the UK Government website for more information.
Paragon Bank recently revealed 2.4 million fixed term non-ISA savings accounts are set to mature in the next three months, up to 887,000 of which have generated enough interest to incur a tax payment.
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Derek Sprawling, the company’s managing director of Savings, advised affected savers look at switching to an ISA variant ”if they don’t already utilise their annual tax-free allowance.’
‘The upcoming months will be a pivotal time for millions of savers as their fixed-rate accounts mature,’ he added.
‘It’s therefore essential for savers to consider their options carefully to match their current, and future, returns.
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‘With a significant portion of these accounts earning rates which were set when underlying reference rates were at their peak and showing signs of upward movement, most maturing savers will, unfortunately, likely not be able to match their previous rate when it comes to an end.’
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