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Millions of accounts now liable for tax on savings interest

Paloma Kubiak
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Paloma Kubiak

More than three million non-ISA savings accounts were liable for tax in April, up from just 250,000 a year ago, analysis reveals.

Millions of Brits could become liable for tax on their savings as interest rates have soared over the past 18 months.

In fact, just £17,500 in a top-paying one-year savings bond could lead to basic rate taxpayers breaching the threshold.

It’s all down to the Personal Savings Allowance (PSA) which was introduced in 2016. It allows basic rate taxpayers to earn £1,000 in interest before facing tax. For higher earners, they can earn up to £500 before paying tax on their savings held in banks, building societies, government or company bonds, credit unions as well as peer-to peer lenders.

According to Shawbrook Bank analysis of CACI data, 3.3 million accounts were liable for the savings tax in April. This figure is up from just 257,000 a year earlier.

Shawbrook warned that savers may be unknowingly hit with tax.

Adam Thrower, head of savings at Shawbrook, said: “High rates are great for savers, and they are now finally getting attractive returns on their deposits.

“However, due to frozen tax thresholds, a basic rate taxpayer with £17,500 in savings could end up paying tax on the interest earned.

“What many should be paying attention to now, especially as rates may increase further, is not just the rate on offer, but the tax implications and thus individual savings account (ISAs).”

Three savings tips

Thrower shares these three tips for savers:

1) ISA or non-ISA

As higher interest rates push many savers towards the threshold for taxable savings income, ISAs are a great way to reduce your tax burden even though they do come with a lower interest rate.

They offer a £20,000 tax free threshold per year and it’s also possible to transfer existing ISA deposits into new accounts, without it counting as part of your annual tax allowance as long as you keep the money within the ISA wrapper by turning to the Cash ISA Transfer Service.

2) Use the right account for you

Situations differ for every saver. Some may have a larger amount of savings than others, or some might wish to use a savings account as a rainy day fund, and so choosing the right account is key.

For those who are looking to build a rainy day fund, an easy access or notice account is more suitable, as you can access your money without incurring a withdrawal fee.

If you are saving towards retirement or have enough capital to deal with emergency situations, a fixed rate account route would be more appropriate and they often hand over better returns.

Using a mixture of accounts should also be considered, as there are no rules in place over how many non-ISA accounts you can have.

 3) Don’t be put off by a lack of high street presence

Many of the leading savings providers do not have a high street presence.

If you were to limit yourself to a ‘big name’ bank, you could curb your potential earnings.

As long as a bank is protected by the FSCS, and is offering a higher rate than what you are currently experiencing, then it might be worth your while to make the switch.