Warning some savers with as little as £8,000 stashed away risk tax charge
Savers are being warned to check they’re not being dragged into paying more tax because of higher interest rates.
Saving rates are at their highest level since 2008 - but if you earn too much money in interest, you may end up having to pay tax. There is a personal savings allowance which lets you earn a certain amount of interest before you start to pay tax.
The personal savings allowance for 20% basic rate taxpayers is £1,000, and for higher 40% rate tax payers, the allowance is £500. Additional rate taxpayers - so those with a salary higher than £125,140 - receive no tax break at all.
Alice Haine, personal finance analyst at Bestinvest, has crunched the numbers to work out how much you would need to have saved in a top-paying account before you need to start paying tax. The top table easy-access account right now pays 5.05%, while the best fix is 6.2%.
Alice said: “A basic-rate taxpayer with about £16,000 stashed in the top one-year fixed-rate deal of 6.2%, who is not making any additional deposits would exceed their £1,000 allowance, earning about £1,020 in interest on their initial pot over the 12-month period. This is assuming the interest is calculated and compounded monthly.
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“While the tax charge will be negligible as it would only apply to the £20 above the £1,000 allowance, so about £4, it illustrates how easy it can be to breach the allowance. For a higher rate taxpayer, a lump sum of £8,000 in the same account would breach their £500 allowance – but again by a negligible sum of about £10.”
Those who earn £12,570 or less receive an extra £5,000 tax-free allowance through the “starting rate for savers” which means they can save much more before paying tax. If your money is saved in an ISA account, then you also won’t pay tax on any interest you make.
Savers can stash up to £20,000 into an ISA each tax year without incurring tax on interest or capital gain. Alice has also touched on other ways to reduce your tax liability if you’re worried about your savings.
She said: “Excess savings can also be added to retirement pots, with pension saving an effective way to reduce an income tax liability as it comes with the added benefit of tax relief applied to pension contributions at their marginal rate of income tax.
“Married couples and civil partners have an additional tax advantage - the ability to make ‘interspousal transfers’ where savings can be switched to a partner subject to lower rates to tax without incurring a tax charge.
“If the higher-earning partner transfers the majority of a savings pot to the lower-earning partner, they can maximise two sets of Personal Savings Allowance, in turn reducing the overall amount of tax exposure for the family.”
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