As rates rise, savers could be unknowingly walking into a tax liability
As interest rates rise, savers could be at risk of exceeding their Personal Savings Allowance as Stuart Coombe, chartered financial planner at Old Mill, explains.
The Bank of England’s Monetary Policy Committee recently increased the base rate by 0.75 points to a 14-year high of three per cent, and while most of the reaction has understandably been on the impact it will have on mortgage rates, its impact on savings should also be considered.
As savings rates rise, they could be unknowingly walking into a tax liability – one that has not been an issue for many years.
There has been a huge amount of debate recently around the current financial climate and how rising interest rates will affect borrowing.
But there is another issue that has not been widely mentioned, and that is the fact that, with increased savings rates, there will be a lot of people unknowingly walking into a tax liability due to the fact they may be exceeding their Personal Savings Allowance.
The Personal Savings Allowance (PSA) is a tax-free allowance that lets you earn interest on your savings without paying tax on that interest.
The allowance you get depends on what rate of income tax you pay:
- Basic-rate (20 per cent) taxpayers can earn £1,000 in savings interest per year with no tax
- Higher-rate (40 per cent) taxpayers can earn £500 in savings interest per year with no tax
- Additional-rate (45 per cent) taxpayers do not get an allowance
Over the past 10 or 15 years you’d have to have had very high balances to earn more than £1,000 of interest, as rates were so modest.
But now, some one-year fixed rates are offering more than 4.5 per cent gross interest, so in theory you only need to have £22,000 or thereabouts to get to that sum.
As tax is not deducted it is important to declare this on your tax return or to advise HMRC if you don’t currently complete a tax return.
But it is also worth remembering that interest from ISAs (individual savings accounts) and Premium Bonds are not included in the PSA, so it may be worth reviewing your savings and considering your own position.
Stuart Coombe is a chartered financial planner at Old Mill
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