Million more to pay tax on savings

Rising interest rates and frozen thresholds will force over one million more taxpayers to pay tax on savings interest this tax year, new data reveals.

Over 2.7 million individuals will pay tax on cash interest in the 2023/24 tax year, up by a million in a single year as more savers breach the personal savings allowance.

According to the figures, the Treasury will collect £6.6 billion in tax on earned savings interest.

Estimates are that 1 in 20 basic-rate payers will pay tax on cash interest this tax year, rising to 1 in 6 higher-rate payers and around half of additional-rate payers. This is due to the freeze on the personal savings allowance, which has remained unchanged since 2016 despite wage inflation and surging interest rates yielding higher gains.

Tax is owed when a taxpayer earns more in interest than the personal savings allowance, which is £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers and non-applicable to additional-rate payers.

Tax is paid either through self-assessment or deducted from income through a tax code adjustment. However, many taxpayers will be unaware that they owe tax until HMRC contacts them.

How to avoid tax on savings

One easy way to avoid paying tax on savings is to utilise your annual ISA allowance. Cash ISAs are just savings accounts you NEVER pay tax on. Everyone in the UK aged 16 or over gets an ISA allowance at the start of each tax year. For tax year 2023/24, which ends on 5 April 2024, the allowance is £20,000.

Just like normal savings, cash ISAs come in different types. There’s easy access, where you withdraw whenever you want, and fixed rate, where you get a guaranteed rate but are supposed to lock cash in for a set time. As of September 2023, there are many high street banks offering interest rates at around the 4.5% mark.

Our wealth management team can advise on savings and investments to help optimise your personal tax planning strategy. Get in touch at info@thomsoncooper.com.

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