Millions of savers across the country have been issued a warning as many savings accounts are at risk of being hit with a tax bill. Five million UK savings accounts are now at risk as savers are being urged to review their finances.
Rise in Taxable Accounts
New analysis by Yorkshire Building Society reveals the number of non-ISA savings accounts forecast to earn over £1,000 in interest has increased by 1,047 per cent in the last eight years, the Mirror reports.
In January 2018, there were 462,000 accounts that would have earned more than £1,000 in interest and potentially faced a tax liability. That figure has since climbed to 5.3 million.
Reasons Behind the Increase
Rising inflation, higher interest rates and frozen tax thresholds have all contributed to millions more savers becoming liable to pay tax on their interest earnings.
Tina Hughes, Director of Savings at Yorkshire Building Society, said: “People doing the responsible thing — saving for a home, for emergencies or for the future — are now being punished by outdated rules. The Personal Savings Allowance urgently needs reform so it keeps pace with reality and supports savers, rather than catching them out.”
Allowance Details and Impact
Basic-rate taxpayers are permitted to earn up to £1,000 in savings interest each tax year before they start to pay tax on the interest earned. Higher rate taxpayers can earn up to £500 in savings interest before they have to pay tax, while additional rate taxpayers do not receive any allowance. Any interest earned above these limits is taxed at your usual income tax rate.
The personal savings allowance was introduced in April 2016 and the majority of easy access accounts paid one per cent or less - now the majority pay three per cent or more. This means that in 2016 basic-rate-tax payers would have been able to put away £100,000 in a typical savings account. In 2026, savers would only be able to save around £25,000 at rates of four per cent without breaching their allowance.
Advice for Savers
If you are at risk of having to pay tax on your savings interest, you could choose to put your money away into an ISA account, where any interest earned is free from tax. You can put up to £20,000 a year into one ISA account or across different accounts.
Rachel Springall, Finance Expert at Moneyfacts, said: “Savers are earning higher rates of interest, but they are also becoming ever more exposed to tax due to fiscal drag. The fact that there are millions of accounts becoming liable to tax over the past five years alone just shows how the Personal Savings Allowance has not moved on with the times and is in dire need of review to protect savers.”
