Be warned: Over 2 million savers could end up paying tax on their accumulated interest
Two bloody million folks, that's right, you heard it, are set to fork over their precious cash to the taxman this tax year, according to data obtained via a Freedom of Information request. That's an 870,000 increase from the previous year!
It's not a pretty picture, and it's all thanks to those pesky interest rates that have been climbing over the past few years, coupled with frozen tax thresholds. Laura Suter, director of personal finance at AJ Bell, who made the FOI request, ain't too pleased about it.
The bloody 2.07 million savers on the hit list are separated like this: 954,000 basic-rate taxpayers, 590,000 higher-rate taxpayers, and 471,000 additional-rate taxpayers. But guess who's seeing a sharp increase? Basic-rate taxpayers. Just half a million of these buggers were hit in the last tax year, and now they're almost at a million!
So, what does this mean for our wallets? HMRC is predicting an ugly £10.4 billion in tax from savings interest this year, up from £9.1 billion last year. Ouch!
Lots of folks might already be feeling the burn, not realizing they've dipped into their personal savings allowance (PSA). And even if you manage to get through this tax year unscathed, Suter warns to keep your eyes peeled for future sneaky tax traps.
But how does this bloody savings tax work, you ask? First off, any interest you earn gets taxed at your highest income tax rate. You might be able to use some of your personal allowance to escape some of it, or the starting rate for savings, which starts at £5,000 and decreases as your income rises.
Once you've got more than £17,570 in income, you'll no longer qualify for the starting rate for savings. Basic-rate taxpayers get a £1,000 tax-free PSA, while higher-rate taxpayers drop to £500, and additional-rate taxpayers get none.
And here's something to chew on: the interest you earn counts towards determining your tax bracket. So, if you're at the borderline between tax brackets, a small increase in interest income could throw you into the next bracket and reduce your PSA significantly.
So, what size savings pots will be hit with tax? If you've got some cash tucked away that's not in a cash ISA, you might be surprised how quickly you breach your PSA and face tax on the interest. A higher-rate taxpayer would need a balance of around £17,000 in a 3% savings account to collect enough interest to bust their £500 PSA.
With interest rates remaining decent, it's a smart move to think twice before stashing your cash in a savings account with high interest—and potentially high tax implications. You can still earn about 4.75% on easy-access accounts or 7.5% with a regular saver account. But don't forget to consider taxes when deciding where to store your hard-earned cash!
So, if you want to escape the taxman's clutches, here are six ways to shield your savings from those pesky tax bills:
- Stash it in a cash ISA: It's an obvious choice, but interest is tax-free, and the annual limit is a generous £20,000.
- Get lucky with National Savings & Investments' Premium Bonds: No interest, but tax-free monthly prizes ranging from £25 to a bloody massive £1 million.
- Overpay your mortgage: With mortgage rates lower than savings interest, paying off some of your mortgage can help reduce your overall interest payments.
- Pay off other bills: Why let savings gather dust while paying taxes on the interest when you could be using that cash to settle bills?
- Contribute to a pension: If you're over the savings limit and want to keep your money growing tax-free, consider making pension contributions. The government even kicks in some extra cash with tax relief!
- Consider other investments: Stocks and shares ISAs, venture capital trusts, and enterprise investment schemes offer tax-efficient ways to grow your savings. But remember, investing involves risk, so make sure it's right for you and your financial goals.
So, there you have it! Now, get out there and do your best to avoid the taxman! And remember, if you're not sure about something, always seek advice from a financial professional. Good luck, and happy (almost) tax-free saving!
- Amidst rising interest rates and frozen tax thresholds, a significant increase in the number of individuals paying taxes on their savings has been predicted, with basic-rate taxpayers seeing a sharp increase from half a million to almost a million.
- As HMRC anticipates an estimated £10.4 billion in tax from savings interest this year, understanding the UK savings tax implications can help you control your financial situation better.
- Interest earned on savings accounts is taxed at the highest income tax rate, and once your income exceeds £17,570, you'll no longer qualify for the starting rate for savings.
- Basic-rate taxpayers get a £1,000 tax-free personal savings allowance (PSA), while higher-rate taxpayers drop to £500, and additional-rate taxpayers get none.
- To avoid the taxman, consider investing in cash ISAs, National Savings & Investments' Premium Bonds, overpaying your mortgage, paying off other bills, contributing to a pension, or considering other investments like stocks and shares ISAs, venture capital trusts, and enterprise investment schemes. However, remember that investing involves risks, so always seek advice from a financial professional before making decisions.
