Why having £8,000 of savings could earn you a tax bill
Savers beware, if you have more than £8,000 in savings accounts you could end up paying income tax on the interest.
With savings interest rates rising, and the tax-free Personal Savings Allowance remaining constant, more savers are going to end up paying tax.
Basic rate taxpayers can earn up to £1,000 in savings interest per tax year without paying tax, or £500 if you're a higher rate taxpayer. Additional rate taxpayers don't get an allowance.
We've worked out exactly how much you'd need stashed away before you'd incur tax.
Earning enough interest to pay tax might seem like a good problem to have, but with inflation eating away at the value of your savings, you need all the interest you can get.
Here we explain how to avoid a tax bill, and what to do if you receive one.
The savings tax tipping point
Based on the top one-year account at the time of writing, which paid 6.1% (Beehive Money, Nottingham Building Society), a basic rate taxpayer would exceed their £1,000 personal savings allowance* with just £16,394 squirrelled away.
A higher rate taxpayer would exceed their £500 allowance with just £8,197.
These are the tipping points beyond which you should consider funnelling additional savings into a cash Isa.
Normal savings accounts usually pay better rates of interest compared with cash Isas.
However, Isas make up for this with their tax-free nature. The best one-year fixed cash Isa on the market at the time of writing paid 5.77% (UBL UK, United National Bank).
If you paid in the full Isa allowance of £20,000 you’d earn £1,154 in interest. With the top savings account, you’d earn £1,220 after tax if you’re a basic-rate taxpayer – £66 more than the Isa.
Higher-rate payers would earn £932 after tax, so would be better off with the Isa.
- Find out more: How to find the best savings account
2.7m savers at risk next year
Some 1.8m savers were slapped with tax bills after exceeding their personal savings allowance last year according to comparison site AJ Bell, raking in £3.4bn for the Treasury.
It predicts this will balloon to 2.7m savers in 2023-24 as rising interest rates and a frozen allowance push more of us over the threshold.
One group of savers that are particularly at risk are those with long-term fixed-rate savings accounts, such as five-year bonds, which in some cases pay all their interest in one go.
All the interest will be treated as though it was earned in the year it was paid in, rather than being spread across the years of the account.
If you have an income below £17,570 may be able to take advantage of the starting rate for savings, which allows for earning up to £5,000 savings interest tax free.
More savers are paying tax
How to pay your interest tax bill
Remember that inflation-driven salary increases could push you into a higher tax band.
Even if you earn a pound more than £50,270 your personal savings allowance will be halved – any more than £125,140, and it’s lost entirely. A projected 5.6 million people will pay the higher rate of income tax in 2023-24 – up 41% compared with 2020-21.
Any tax due will usually be collected automatically through the PAYE system, using information provided by banks and building societies.
Alternatively it can be declared on a self-assessment tax return.
- Find out more: How to find the best cash Isa
3 ways to maximise your savings without paying any tax
- If you've got more than a few thousand pounds in saving, put extra savings into a cash Isa. You can deposit up to £20,000 into Isas per tax year.
- When selecting fixed-term savings accounts outside an Isa, check when interest is paid. Look for those that pay monthly or annually, rather than 'at maturity'.
- If you've got savings you don't need for at least five years, you could earn a better return by investing. A stocks and shares Isa means all profits and dividends are tax-free.
