Higher interest rates on savings are good news
— but they could mean paying more tax says Paul Lewis
Until recently, few people had to worry about tax on their savings. All basic rate taxpayers get £1,000 personal savings allowance, which means the first £1,000 of interest on savings is tax-free. That covered most people when interest rates were low: a year ago, with interest rates around 2%, you could have had £50,000 savings without needing to worry about tax.
But now best-buy savings rates are 5%, or even 6% in a one-year bond. At those rates, savings of £20,000 or £16,667 will trigger a tax bill. If you are a higher rate taxpayer, the allowance is cut to £500, meaning it’s even more likely that tax will be due. Some people, however, get a bigger tax-free savings allowance.
If your taxable income apart from savings interest is less than £17,570 a year you get an extra allowance of up to £5,000 a year. You work out
how much that allowance is by subtracting your taxable income from £17,570. If your income from wages and pensions is, say, £14,000, you can have £3,750 at the “starting rate for savings”, which is 0%, so no tax is due. You also get the £1,000 personal savings allowance on top, making a total of £4,750 savings interest that’s tax-free. Even if your savings earn interest of 6% a year, you could have more than £76,000 in savings before any tax was due on it.
If your taxable income is below £12,570 then more savings interest can be tax-free, as no tax is due on income below that level. For example, if your only income is a new state pension of £10,600 a year, the next £1,970 of savings interest is tax-free. You also get the £5,000 starting rate and the £1,000 personal savings allowance, making a total of £7,970 tax-free interest. Banks and building societies inform the Revenue of all interest earned, and your tax code should be adjusted to recover any tax due.
Your job? If you have a partner, it may be worth moving savings to the person with the lower income to maximise those tax-free amounts. If tax is due, you should consider moving some savings into a tax-free cash Isa: you can put up to £20,000 every tax year into one.
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QUESTIONS? Send any questions to Paul.Lewis@radiotimes.com. Paul cannot answer you personally, but will reflect them in his column