Savers issued warning over tax trap that could eat away at your cash

09 March 2024 , 07:00

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You may end up getting taxed on your savings (Image: Andrew Paterson)

Savers are being urged to beware a tax trap that could eat away at your cash - but there is a way to protect your money.

More people are at risk of breaching the personal savings allowance, due to much higher interest rates. The personal savings allowance sets how much you can earn in savings interest before you start paying tax. For 20% basic rate taxpayers, the personal savings allowance 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. But one way to protect your savings from tax is to put your money into an ISA account. You can invest up to £20,000 tax-free each year and any interest earned is not subject to tax.

New research from Paragon Bank shows the number of adult savings accounts with balances large enough to incur tax on savings interest has tripled in the past year. Based on the latest available CACI data, the analysis shows a 246% increase in active adult non-ISA accounts earning over £1,000 in savings interest.

The figure now stood at 5.5 million accounts in November 2023, versus 1.6 million accounts in November 2022. As a percentage of all non-ISA adult accounts, that increased from 2.7% to 8.8% over the year to November 2023.

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Similarly, the number of accounts exceeding the higher-rate threshold, those generating more than £500 interest, increased from 3.5 million in November 2022 to 8.7 million in November last year. As a proportion of total non-ISA adults accounts, that increased from 5.9% to 13.8% over the same period.

Derek Sprawling, Paragon Savings Director, said: "These rising balances, fuelled by savings rate increases last year, leave some of the most proactive savers exposed to unexpected tax bills. Fortunately, Cash ISAs offer a valuable shield against this burden, allowing savers to shelter up to £20,000 per year from tax. By maximising ISA utilisation, savers can ensure their hard-earned interest stays in their pockets."

Savers with a balance of £12,500 in a savings account offering 4% interest would generate £500 per year. That would need to increase to £25,000 for basic rate taxpayers to generate the £1,000 savings interest required before they start paying tax on their savings.

Levi Winchester