Money Saving Expert founder Martin Lewis has warned people who have £10,000 in savings that they could face losing money to tax thanks to the bumper interest rates currently on the market.
Martin revealed that the situation around tax on savings ‘really has changed very much’ in the last few years as savings account interest rates have soared from a miserable 1 percent to a much more healthy 5 percent.
But because the interest rate is so much better, more people who have savings are eligible to start paying tax on the interest generated because they use up all of their Personal Savings Allowance, i.e. the amount you can earn in savings interest before you’re liable to pay tax on it.
Speaking on the ITV The Martin Lewis Money Show Live, Martin warned that a basic rate taxpayer with £20,000 in savings could owe tax within just 12 months, and that a higher rate taxpayer – someone earning £50,270 a year – could owe tax on just £10,000 of savings.
Martin explained: “So look, savings tax is back for many. When you get interest on your savings, it is eligible for income tax. It counts as income.
“But you get a Personal Savings Allowance. What this means is a basic rate taxpayer can earn £1,000 a year of interest and you don’t pay tax on it. It can be in any form of savings account that you like.
“As a higher 40 percent taxpayer, you can earn £500, as a top 45 percent taxpayer if you earn over £125,000 a year you don’t get one of these.
“So what does that mean in practice? So if you take that top 5 percent figure, as a basic rate taxpayer if you have over £20,000 in savings at 5 percent, you would earn more than a grand of interest so everything above that would be taxed.
“As a higher rate taxpayer it’s £10,000.
“So for those people saving £100, £1,000, £2,000, it’s irrelevant to you if you’re a basic rate or higher rate taxpayer.
“For those people who’ve got savings that get into the tens of thousands of pounds, tax starts to become more important.
“And the reason it’s come back is, when interest rates are 1 percent, to earn £1,000 of interest you needed a hell of a lot in savings. Now they’re 5 percent, you need a fifth of it, so it really has changed very much.”
