Millions now face tax on their savings for first time in seven years

For the first time in almost seven years, Savers will be required to pay tax on savings interest.

Rising interest rates could mean that savings account earnings could rise by hundreds of thousands of pounds this year.

This means millions of basic-rate taxpayers could bust their £1,000 personal savings allowance for the first time since its introduction in April 2016.

Tax thresholds: Rising interest rates mean that earnings from savings accounts could soar by hundreds of pounds this year.

The income tax thresholds are also being frozen until April 2028. People who receive a raise in their pay could move from the 20% basic-rate tax bracket up to the higher 40% rate.

As a result, their personal savings allowance will halve to £500 and any interest they earn above this level will be liable for tax.

Tax changes in this month’s budget are also expected to take some 232,000 taxpayers into the 45 per cent additional rate tax bracket. They will not receive any concessions on savings interest.

Basic-rate tax starts when your income hits £12,571. You’ll pay the higher 40 per cent rate once your income reaches £50,271 and the additional 45 per cent rate will kick in at £125,140 from April 2023. This was reduced from £150,000 in the Budget earlier this month.

The personal savings allowance gives around 27.2 million basic-rate taxpayers the first £1,000 they earn each year from an ordinary savings account tax-free.

The 5.5 million higher- rate taxpayers have an allowance of £500, while the 629,000 additional rate payers don’t get anything. 

The allowance has not been increased since its inception. Laura Suter, head of personal finance at investment platform AJ Bell, says: ‘Income tax allowances have been frozen, so more people are being pushed into the next tax bracket and seeing their personal savings allowance cut or disappear altogether.’

Part of the reason more people are at risk of paying tax is because the amount of money invested in taxable savings accounts has soared since then — by per cent 47 per cent to £1.167 trillion.

Years of low interest rates have meant savers didn’t have much chance of using their tax-free allowance. With better rates and higher savings, this is about to change.

Sarah Coles, a personal finance analyst at investment platform Hargreaves Lansdown, says: ‘Now that interest rates are higher, if you put more cash on deposit, there’s an ever- increasing chance that you’ll breach the allowance.’

The best easy-access account earned around 0.5% last year. As a basic-rate taxpayer, you could have £200,000 in your account and not earn enough interest to breach the personal savings allowance. For higher-rate payers, the sum was £100,000.

Now, with the best rate at 2.81 per cent, the sums have dropped to around a sixth of these levels, at £35,587 and £17,793 respectively.

The latest figures from HM Revenue and Customs indicate that 13.9 million taxpayers have received interest on savings made with banks and building societies in the year up to April 2020.

What should savers do to make their money work?

You can use your Isa tax free allowance. Cash Isas was once the darling of savings. But, due to persistently low interest rates as well as the arrival of the personal saving allowance, cash Isas have fallen out of favor.

Isas function in the same manner as ordinary accounts, but all interest is exempt from tax. 

It does not count toward your income when determining the amount of income tax that you must pay.

You can save £20,000 each tax year — which runs from April 6 one year to April 5 the next.

The top rates are 2.5% from Cynergy Bank and Scottish BS on easy-access accounts.

This is a better rate for tax payers than the slightly higher 2.81 Percent in a nonIsa account.

After Basic rate tax at 20% works out to 2.24 percent or 1.68% for a higher-rate payer.

Shawbrook Bank is the top Isa with a fixed-rate of 3.78%, while Atom and GB Bank offer 4.35 or GB Bank the best bonds.

The latter will be worth 3.4 8 per cent after tax to a basic-rate payer and 2.6 1 per cent to someone who pays higher-rate tax.

The best cash Isa savings rates 

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