Life Landscaping® from Amber River

With more than 20 years’ of experience, Michael Hawthorn enjoys helping people to align their wealth with the things that matter most to them.

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Michael Hawthorne brings over two decades of expertise in financial planning and wealth management to his role at Amber River True Bearing. We spoke to him about the increasing numbers of savers unknowingly exceeding their personal savings allowances.

Gone are the days when earning 5% interest on savings was common, and the interest was automatically taxed at 20%. Back when I started my career, savings tax generally only affected those in higher or additional income brackets. However, with interest rates rising and allowances at a standstill, the tax implications on savings have become a factor for everyone.

An article in The Times recently reported a sharp increase in the number of people paying tax on their savings interest, with nearly 1.8 million incurring tax penalties last year—82% up on the previous year. Projections indicate that this year (2024/25), seven million savers could face over £6.6 billion in taxes on their interest earnings. Although beneficial, this revival in interest rates also poses a risk of what’s known as the “tax trap.”

In early 2022, the highest interest offered by easy-access savings accounts was only 0.5%, and the best fixed-rate bonds were just over 2%. Today, these rates have risen to an average of 3.12% for easy-access accounts and 4.62% for one-year fixed accounts, with even better deals for those who seek them.

While this increase is good news for many, it also indicates a potential rise in tax liabilities for others.

Seven million savers could face over £6.6 billion in taxes on their interest earnings

When do I need to start paying tax on my savings?

Knowing when you need to start paying tax on your savings is essential to avoid falling foul of HMRC. Here’s a breakdown of the key allowances and tax bands that determine whether your savings will be subject to tax.

1. Individual Savings Account (ISA)

First, the simplest way to avoid paying tax on your savings is to use an ISA. You can invest up to £20,000 every year into an ISA and not pay any tax on the interest earned. This is often the first line of defence against paying tax on savings.

2. Personal allowance

The personal allowance is the amount of income you can earn each year without having to pay income tax. For the 2024/25 tax year, this is set at £12,570 for most individuals. It encompasses earnings from employment, pensions, and also from savings interest, offering a substantial buffer before taxes kick in.

3. Starting rate for savings

This is an additional tax-free allowance specifically aimed at those on lower incomes. If your other income (from pensions or employment) is less than your personal allowance of £12,570, you can earn up to £5,000 in savings interest without any tax liability. However, this allowance reduces by £1 for every £1 your income exceeds the personal allowance, disappearing entirely once your other income reaches £17,570.

4. Personal Savings Allowance (PSA)

Beyond these allowances, the Personal Savings Allowance provides further relief. If you’re a basic rate taxpayer (earning between £12,570 and £50,270), you can earn up to £1,000 of savings interest tax-free annually. For higher-rate taxpayers (earning above £50,270), this allowance is halved to £500.

It’s possible to combine these allowances. For instance, a basic rate taxpayer with minimal other income could potentially shield up to £18,570 of savings interest from taxes (combining personal allowance, starting rate for savings, and PSA) under the right circumstances.

How likely are you to exceed your PSA?

The PSA was introduced in 2016 when interest rates were notably low. At that time, a basic-rate taxpayer would need about £200,000 in an easy-access account to exceed their £1,000 tax-free interest limit, while higher-rate taxpayers needed £100,000 to exceed their £500 limit.

However, recent increases in the Bank of England’s base rate to combat inflation have changed this dynamic significantly. Today, a basic-rate taxpayer only needs approximately £19,300 in a top-paying easy-access account to surpass the PSA, and a higher-rate taxpayer requires just under £9,700.

This means more savers need to consider alternative strategies, such as an ISA, to manage potential tax liabilities and make the most of their savings.

Should you inform HMRC about your savings interest?

Financial institutions report the interest they pay you to HMRC each tax year, typically in the summer, so HMRC is already aware of your potential tax liabilities.

If you regularly complete a self-assessment tax return, simply include your savings interest amounts when you file. If you don’t file a self-assessment and your interest earnings exceed your allowances, you’ll need to notify HMRC. For many individuals, HMRC may adjust your tax code to account for the tax due on your savings interest from the previous year.

For those with higher incomes, who are self-employed, or already file a self-assessment, it’s necessary to declare your savings interest through your tax return. Your savings provider will give you with the necessary details by June following the end of the tax year in which the interest was earned.

Concerned about tax on your savings?

If you’re unsure whether you’ll need to pay tax on your savings, speak to your accountant, who can advise. If you want your savings and investments to work as tax efficiently as possible, please contact us to arrange a meeting with an Amber River independent financial adviser near you.

Get in touch

To arrange an appointment with Mike, or another Amber River financial planner in your area, call 0800 915 0000. Alternatively, use our contact form here.