Do you need to pay tax on your savings? Warning to savers in 6MILLION accounts

Savers are more than forty times more likely to be liable to pay tax on their savings than they were just three years ago, new figures have revealed.

Millions of savers could be at risk of breaching the personal savings allowance (PSA) and be facing a tax bill, analysis by Shawbrook Bank has revealed.

The research based on where interest rates have stood since October shows about 6.1 million accounts would be liable for tax.

That’s up from 5.3 million last year, 1.5 million accounts in October 2022 and just 147,000 savings accounts in October 2021.

The calculations are based on CACI data from contributing members of the monthly Current Account and Savings Database. 

The personal savings allowance means basic rate taxpayers can earn £1,000 of interest from their savings each year tax free, but this is slashed to £500 for higher rate taxpayers and is zero for those paying 45p tax. 

Frozen: The personal savings allowance (PSA) thresholds, introduced in 2016, were designed to let savers earn a limited amount of interest tax-free but have not been changed since

Frozen income tax thresholds are dragging increasing numbers of people into paying higher rate tax on the savings interest they earn. 

This means that those earning more than £50,270 will lose 40 per cent to tax on any interest of more than £500 per year.

Meanwhile, savings rates are such that anyone with a decent chunk of cash not stashed in tax-free Isas is in danger.

The best paying easy-access savings rates are around 4.5 per cent and the best one-year fixes are paying around 4.75 per cent.

Someone stashing their money into a 4.5 per cent easy-access deal would only need £11,112 in an account to start beng taxed, if they were a higher rate taxpayer.

For someone in a 4.75 per cent fixed rate savings account, any lump sum above £10,526 will see some interest taxed.

With increasing numbers of savers benefitting from the high savings rates on offer and with the personal savings allowance frozen, many are unknowingly being dragged into paying tax on their savings, according to James Blower, founder of The Savings Guru.

‘Interest rates on savings have risen so much and the 31 January deadline for submitting a tax return will catch all those from 2023-24 who earned rates that got over 6 per cent,’ said Blower.

‘Although Isa subscriptions are at record highs, there will inevitably be plenty of savers who just haven’t appreciated they are over the PSA and those who have maxed out Isas and the PSA so have to pay for the first time in years. 

‘A few years ago, basic rate taxpayers could have paid no tax on over £100,000 of savings with rates so low. 

‘Now, just £20,000 could be enough to tip a basic rate taxpayer over the PSA and £10,000 for a higher rate tax payer. The Exchequer is likely to do very well from savers.’

With the end of the current tax year on 5 April, Adam Thrower, head of savings at Shawbrook Bank, is warning savers to utilise the tax advantage of the Isa allowance. 

‘In the past, tax on savings was something that not many needed to think about due to the low interest rates on offer,’ said Thrower.

‘However, with higher rates now available, many savers could encounter an unexpected pitfall that eats into their hard-earned interest.

‘For savers wanting to take advantage of the higher rates on offer while protecting hard-earned cash from tax, isas might be worth considering. 

‘Allowing you to save up to £20,000 tax free per person, ensuring you have made adequate use of this before the limit resets in April could be worthwhile. 

‘And for those wanting to make the most of their savings, taking the time to look beyond the big names and high street banks could mean you find a better rate of return, allowing you to make the most of the tax-free earnings.’

Downside: rising interest rates, an increasing number of savers are now exceeding their respective PSA thresholds

Do savers need to submit a tax return?

Savers often wonder how on earth HMRC can police who is – and isn’t – playing by the rules when it comes to savings interest.

The good news is that not everyone who owes tax on their savings will need to file a return. Banks and building societies report interest paid to HMRC and it adjusts tax codes.

HMRC’s rules state that anyone earning under £10,000 from savings and investments doesn’t have to complete a tax return, which will account for the vast majority of people.

In cases where savers earn more than their PSA, but have less than £10,000 of income from savings and investments across the year, HMRC says their tax liability will be calculated and paid automatically.

However, those who already complete a self-assessment tax return, for example if they are self-employed, must report any interest earned from savings on their form.

If someone is employed or receives a pension, HMRC will automatically update their tax code and take the tax from their earnings in most cases.

To decide their tax code, HMRC will estimate how much interest they’ll earn in the current year by looking at how much they received in the previous year.

If a saver is not employed, does not receive a pension and does not complete a tax return, HMRC uses information provided directly by banks and building societies about any savings interest they receive. 

It will use that to inform people if they need to pay tax, and how to pay it.

Shawbrook’s Adam Thrower added: ‘Tax can be complicated, and knowing if, when, and how to submit a tax return isn’t always straightforward. One key point to remember is that it’s the individual’s responsibility to inform HMRC if they believe they’ve paid too little – or even too much – tax. 

‘Tax owed is sometimes collected via an adjusted tax code, but seeking independent tax advice or contacting HMRC directly can help ensure everything is handled correctly.  

‘Banks and building societies report interest earned on savings to HMRC annually, and HMRC should use this information to update the individual’s tax code so that any tax due can be collected through PAYE. 

‘However, mistakes can happen, so it’s always worth checking that your tax code reflects the correct information.’

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