Paragon Bank has calculated that these 1.2 million accounts, maturing between June and December, will generate £500 or more in interest each. Higher-rate taxpayers have to pay tax on interest of over £500, while basic-rate taxpayers need to pay tax on interest of more than £1,000.
Andrew Wright, Paragon Bank’s head of savings, said: “Many savers will have had a great return on their savings but could ultimately breach their personal tax allowance as a result.
“I urge savers to review their accounts and make the most of their tax-free allowance by utilising other savings products, including cash ISAs.”
The rules around savings and tax
Most savers have a personal savings allowance (PSA) that allows them to earn some interest from their bank accounts for free. For basic-rate taxpayers, it is £1,000, and for higher-rate taxpayers, it is £500, while additional-rate taxpayers do not have an allowance at all.
Interest above that level is taxed at your marginal tax rate – so 20% if you’re a basic-rate taxpayer, 40% if you are a higher-rate taxpayer and 45% if you pay additional-rate tax.
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If you think you are going to breach that allowance, you can avoid needing to pay the tax by putting money into an ISA or using Premium Bonds, where any prize you win is tax-free. At present, everyone can put £20,000 into an ISA every year, spread between cash and stocks and shares.
According to Moneyfacts Compare, the highest paying cash ISAs pay 5.46% for instant access and 4.28% for a one-year fix. Meanwhile, it is possible to get a one-year fixed rate bond outside an ISA for 4.45%.
Rachel Springall, personal finance expert at Moneyfacts Compare – a comparison service for financial products – said the choice is at a record high, but rates are at their lowest for almost two years.
She said: “It is evident that cash ISAs are highly sought after, with the latest statistics from the Bank of England revealing a record monthly high of deposits of around £14bn during April.
“The noise surrounding cash ISA reforms and the rush of savers looking to protect their hard-earned cash from tax would have been a key influence in the significant deposits.
“Providers must continue to work hard to support their new and existing customers and savers must ensure they stay within their personal savings allowance (PSA) and take full advantage of their ISA allowance when reviewing their pots or shopping around for a new deal.”
