Following significant month-on-month interest rate hikes since the start of last year, millions more savings accounts are now liable for tax, reports show.
Higher interest rates, which are largely a product of successive Bank of England Base Rate rises, paired with frozen personal allowance (PSA) thresholds, are dragging many more into the tax net without them realising.
In a recent report from AJ Bell, it is estimated more than 2.7 million people will owe tax on cash interest in the 2023.24 tax year. This total includes nearly 1.4 million basic-rate taxpayers, a number that has quadrupled in four years.
Currently, basic taxpayers can earn £1,000 a year in interest before any tax is owed, while higher-rate taxpayers can earn £500 before paying HMRC any of it.
Lucinda O’Brien, expert at money.co.uk savings accounts, said: “Latest reports mean more and more people will be faced with a tax bill they might not be expecting to pay.”
While this will be worrying news to many, Ms O’Brien said there are “many factors” to consider, as well as ways to mitigate the burden.
Firstly, paying tax on savings interest works “slightly differently” depending on how a person works. Ms O’Brien explained: “If you are self-employed, fill in your self-assessment as normal and declare interest on your savings, then you’ll find out how much tax is due.
“However, if you are employed and taxed under PAYE, HMRC will change your tax code, so you pay the tax automatically. To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year.
“This means if a customer earns interest above their personal savings allowance, and is employed or receives a pension, HMRC will automatically update their tax code and collect any tax due.”
Customers also need to register for Self-Assessment (SA) if their income from savings and investments is more than £10,000. If their income from savings and investments is less than that, then they don’t need to register for SA.
What’s more, Ms O’Brien said: “The PSA also applies to other types of savings income, not just the interest you’ve earned on bank accounts, such as corporate bonds and gifts, plus interest from providers like credit unions and NS&I products.”
Those who want to “minimise” – or avoid – having to pay tax on savings interest can always move savings into an ISA.
Ms O’Brien said: “Everyone has an ISA allowance of £20,000 a year, which means you can move some of your savings into an ISA and earn interest tax-free.”
Shawbrook Bank is currently offering an easy access cash ISA at 4.43 percent and it has a one-year fixed rate bond at a competitive interest rate of 5.78 percent.
Ms O’Brien said: “The key with paying tax on your savings is to face the reality that you may lose some of the interest you’ve earned.
“Keep an eye on your payslip if you are employed or keep a note of your savings so you can fill in your self-assessment accurately.”
