Thu 18 Jul 2024

 

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Number of accounts where savers risk tax bill doubles in a year – is yours one?

Savings rates have remained high - meaning some savers risk facing tax bills

The number of open savings accounts which leave people at risk of a tax bill has doubled in the past year, analysis shared with i shows.

At least six million risk paying a portion of their interest earnings to HMRC, according to analysis of business consultancy CACI’s data by Shawbrook Bank .

Savers have to pay income tax at the normal rate of 20 per cent if they make over £1,000 in savings interest in one tax year. Higher rate tax payers have a smaller allowance of £500 and additional rate tax payers have no allowance.

In April – the start of the new tax year – six million accounts risked earning more than £1,000 in interest, up from three million a year prior.

If a saver had £20,000 in a savings account paying more than 5 per cent interest, they would face paying tax, as they would earn more than £1,000.

A basic rate taxpayer earning £2,000 in interest, could find themselves with a tax bill of £200, however, for higher rate taxpayers this would be £600 and additional rate taxpayers would be £900, which would significantly reduce how much your savings earn for you.

Rates of up to 5.2 per cent are available on some easy-access savings accounts, and rates of 5.5 per cent are possible if customers lock their cash away.

Adam Thrower, head of savings at Shawbrook, said: “For many years, tax on savings has been something of an aside due to low rates, but with high interest and frozen thresholds, this becomes more of a concern.

“Savers must now consider tax and the impact this might have on their overall returns as a central issue when deciding where to place their hard earned money. Thankfully, through ISAs people can save £20,000 per person tax-free, which remains the number one way to save tax efficiently.”

More people are being dragged into paying tax as savings rates improved at the same time interest rates grew to their current 16-year high of 5.25 per cent.

Andrew Hagger, founder of Moneycomms.co.uk, said: “While savings rates were stuck in the doldrums, the issue of exceeding your annual personal savings allowance (PSA) wasn’t a problem for many savers, unless they had substantial credit balances.

“Now with savings account rates having increased five fold in some cases, many more savers now risk breaching their PSA limit and having to pay tax on an element of their interest income.

“Cash ISAs are now back in vogue because of this issue, allowing savers to ring-fence £20,000 of balances per tax year. ISA rates may be slightly less competitive than standard savings rates, but once you factor in the 20 per cent or 40 per cent tax you’re saving, it becomes a no-brainer.”

Cash ISAs are like normal savings accounts, but do not attract tax on the interest earned via them.

Although usually lower, top rates on ISAs are currently similar to normal savings accounts, with Trading 212 currently offering a cash ISA paying 5.2 per cent, so for those who are likely to pay tax, they are an option worth considering.

The best easy access savings account is now with Ulster Bank, offering returns of 5.2 per cent, while a one-year fix for 5.21 per cent is available with SmartSave.

In previous years, savings rates have been far lower. Three years ago today for example, the best account on the market paid just 0.5 per cent, so basic rate taxpayers would have needed more than £200,000 in their savings to breach the tax-free limit.

CACI has 40 savings providers that send data to them, which is then anonymised, and was used as the basis for the calculations.

But for the analysis, Shawbrook assumes all the account holders are basic rate tax payers, so the actual figure for the number who risk owing tax is likely to be higher.

It multiplied the amounts in the accounts by the interest rate to calculate if the savers were likely to breach their tax-free allowance.

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