Savers facing being taxed on interest for the first time

Rising interest rates are a worry for those with a mortgage or loan, but for savers, it means an increase on their investment as savings rates rise.

It also presents a challenge and can tip savers into the bracket where they have to start paying tax on their interest.

The latest interest rate rise in August saw a full half percentage point increase.

The rise means that more savers could have to pay tax on increased interest made from savings.

The Personal Savings Allowance (PSA) allows savers to earn up to £1,000 of interest and not have to pay tax on it, depending on their Income Tax band. This reduces to £500 at the higher rate and disappears for the additional rate.

For those with a joint account, interest will be split equally between the account holders. According to HMRC, interest on savings covers:

• Savings and credit union accounts
• Bank and building society accounts
• Unit trusts, investment trusts and open-ended investment companies
• Peer-to-peer lending
• Trust funds
• Payment protection insurance (PPI)
• Government or company bonds
• Life annuity payments
• Some life insurance contracts

The PSA was introduced in April 2016 and means any savings earned won’t be taxed up to a certain limit based on an individual’s current income tax rate.

The downside is that in the six years since its introduction, the figure has remained at £1,000.

However, before reaching the £1,000 PSA limit, you would need tens of thousands of pounds in the savings accounts, at current interest rates. Even with some of the higher paying accounts.

A basic tax rate saver would need to have around £30k in an account paying 3.35 per cent before coming close to breaching the PSA limit. It is estimated that around 95 per cent of savers don’t pay any tax on their savings interest due to the PSA.

Need help and advice on savings and taxation matters? Please call our team today.