Nearly five million Britons could soon be set to discover they owe the taxman some cash, new analysis by the Yorkshire Building Society (YBS) reveals. These Brits – many possibly unknowingly – are forecast to exceed their Personal Savings Allowance (PSA) this year, which is the amount of interest you can earn on your savings annually without incurring tax.
Personal Savings Allowance unchanged since 2016
Currently, basic-rate and higher-rate taxpayers can earn up to £1,000 and £500 in tax-free interest on traditional savings accounts, respectively. Additional-rate taxpayers receive no exemption and are taxed on all interest earned outside of tax-free accounts.
Despite rising inflation and interest rates on savings, these PSAs have not increased since 2016, when they were first introduced. Subsequently, the number of savers slapped with tax bills from HMRC has quite literally rocketed. Since 2018, YBS said the number of non-ISA savings accounts forecast to earn more than £1,000 in interest has increased by 1,047%, with 5.3 million expected to be billed this tax year.
Lack of awareness and how to pay
With people holding between three and five savings products on average across two to three providers, many may be completely unaware that the amount of interest they’ve earned across accounts makes them liable for tax. Despite the scale of the issue, 36% of people admitted to having never heard of the PSA, while only 31% know how to pay the tax if they exceed it.
If tax is payable on your savings interest, it’s charged at your usual income tax rate (20%, 40%, or 45%). HMRC will then usually change your tax code so you’ll pay the tax automatically. If you use a self-assessment tax return, you’ll need to declare the savings interest on that.
Tax-efficient alternatives and support
If you find you’re one of the 5.3 million on track to be billed, consider moving your cash into a more tax-efficient account. You can currently stash away up to £20,000 per year tax-free in an ISA. Cash ISAs work like normal savings accounts, whereas Stocks and Shares ISAs allow you to invest in a range of assets, including stocks, bonds, and funds, with any gains being tax-free.
At the time of writing, fixed-rate ISAs offer up to 4.72% AER (Castle Trust Bank), while easy access accounts offer up to 4.61% AER (Sidekick).
