Savers face being stung thanks to interest on their cash, which is all paid out in one go, counting for one tax year – despite the accounts being open for years in some cases.
Savers face being stung thanks to interest on their cash, which is all paid out in one go, counting for one tax year – despite the accounts being open for years in some cases.
HMRC is preparing to issue letters demanding tax from savers – thanks to a little-known quirk of the personal allowance system. Savers face being stung thanks to interest on their cash, which is all paid out in one go, counting for one tax year – despite the accounts being open for years in some cases.
Basic rate taxpayers – earning £12,571 to £50,270 annually – are allowed to earn £1,000 a year in tax-free interest, with anything above this amount charged at 20%.
Meanwhile, the personal savings allowance (PSA) for those on the higher rate – with an income of £50,271 to £125,140 each year – is £500, beyond which a 40% tax is incurred.
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Because you’re taxed on savings interest in the tax year you can access it, if you opt for a fixed-rate savings account longer than a year where the interest is paid at maturity, all the interest is counted towards the final year’s PSA.
It means, worryingly, higher rate taxpayers with as little as £3,500 on a three-year fixed rate of 5% will go over their allowance, or roughly £7,000 for anyone on the basic rate.
Income affecting your PSA could come from several sources, including interest earned on non-ISA savings, like a savings bank account, interest on fixed-rate bonds, interest on peer-to-peer loans, and interest on government and corporate bonds.
Lloyds Bank advises: “Do I have to pay tax on my savings? There’s no simple answer here, as personal circumstances can vary so much. If you already complete a personal tax return, you should declare any interest earned on your savings as part of your calculations.
“Any amount of tax due will depend on your other sources of income, tax allowances and so on. If you don’t usually complete a personal tax return, you may find that your tax code changes over time.
“That’s because your bank will notify HM Revenue & Customs (HMRC) of any interest received. HMRC will, in turn, complete any necessary calculations and changes. Interest earned from money held in ISAs are an exception. These are tax-free.”