Savers face unexpected tax bill if they have more than £9,000 stashed away
Savings rates have improved hugely over the last year - but many people are unaware that they may need to pay tax on the interest they make.
There is a personal savings allowance which lets you earn a certain amount of interest before you start to pay tax. The personal savings allowance for 20% basic rate taxpayers is £1,000, and for higher 40% rate taxpayers, the allowance is £500. Additional 45% rate taxpayers receive no tax break at all on savings. Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, has calculated how much you can save right now in a top-paying account before you start paying interest.
For an easy-access account paying 5.20% interest, you could put away £19,231 as a basic rate 20% taxpayer before you breach the tax threshold. The figure is much smaller for higher rate 40% taxpayers, who can save £9,597. For a one-year fixed account paying 5.21% interest, the most you could save as a basic rate 20% taxpayer before you start paying tax would be £19,194. Higher rate 40% taxpayers can put away £9,616.
Alice told The Mirror: "The headline-grabbing savings rates of last summer may be long gone but the top deals of today remain competitive with the best easy-access and fixed-term accounts still comfortably topping the 5% mark. However, with interest rate cuts expected this year those with sizeable sums to stash away should lock in the top savings rate for their rainy-day pots while they still can. Stash too much in a regular savings account, however, and they run the risk of breaching the personal savings allowance."
If you’ve got a lot of money in savings, Alice suggests you may want to look at opening an ISA, which is a type of savings account where you don't pay tax. You can put up to £20,000 into ISA accounts each tax year. The best-paying easy access ISA at the time of writing offers a rate of 5.09%, or you can get up to 5% for a fixed account.
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Alice said: "Remember, the £20,000 tax-free allowance applies across all types of ISA, so a saver could store a small share of their savings in a high-interest, easy-access cash ISA for shorter term savings goals such as a holiday or wedding. Any additional funds could be directed towards a stocks and shares ISA for financial goals with a time horizon of five years or more, such as retirement or funding a child’s university costs, to take advantage of longer-term investment returns."
Alice also flagged how married couples and civil partners can make "interspousal transfers" where savings can be switched to a partner. Couples can also make use of their double ISA allowance. She said: "A higher-earning partner that transfers a chunk of their savings pot to the lower-earning partner can maximise two sets of personal savings allowance, in turn reducing the overall amount of tax exposure for the family. Couples can also double up on their ISA allowance, potentially stashed up to £40,000 tax free."
Finally, savers can also use their personal allowance of £12,570 to earn interest tax-free, if it has not been used up by earnings, a pension or other income. Alice added: "Those earning less than £12,570 also receive an extra £5,000 tax-free allowance for their savings income, known as the starting rate for savers. This means an individual can earn £12,570 in income and £6,000 in savings interest (£5,000 starting savings allowance plus the personal savings allowance of £1,000) - that’s a total of £18,570 from wages and savings interest before tax is applied."
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