Savers may be hit with tax on savings for first time as rates rise
- On October 6, 2022
- By GrowthInvest Marketing
The rates war in the savings market is great news for those with cash stashed away, but many will be hit with an unexpected tax bill as a result of getting a better return on their savings.
The Personal Savings Allowance gives basic and higher rate taxpayer a tax-free allowance for their savings income, but rising interest rates mean that many will breach it for the first time.
On top of this, because income tax allowances have been frozen, more people are being pushed into the next tax bracket and so seeing their Personal Savings Allowance chopped in half or disappear altogether. Basic-rate taxpayers can earn £1,000 on their savings before being taxed, while higher rate taxpayers get a £500 limit and additional rate taxpayers get no tax-free allowance.
When base rate was 0.1%, if your savings were earning that amount of interest, a basic-rate taxpayer would need to have £1 million in cash savings to hit their £1,000 tax-free limit. However, fast forward to today and with the top easy-access savings account now paying 2.35%* that same basic-rate taxpayer would only need to have £42,500 in savings to hit the limit. What’s more, if that basic-rate taxpayer had seen their income rise in the past few years and had tipped over into the higher-rate income tax bracket, they would only have a £500 tax-free savings limit, meaning they would need to have £21,250 in savings before they hit their new, lower limit.
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