A substantial number of savers may be at risk of losing money in tax, according to recent research.
An analysis carried out by Shawbrook Bank found there were nearly 4.2 million savings accounts at risk of tax in September 2023, an increase of 900,000 since April 2023.
The data from CACI also showed there were just 257,000 accounts at risk of tax a year earlier.
Savers are entitled to a tax-free allowance of £1,000 for a basic rate taxpayer, £500 for a higher rate taxpayer and nothing for an additional rate taxpayer.
However, with interest rates on savings rising to decade highs and allowance thresholds remaining frozen, more people are finding themselves liable to foot an unanticipated tax bill.
The bank is urging Britons to check if would be better off saving into an ISA than a traditional savings account.
Individual Savings Accounts (ISAs) are a tax wrapper, enabling savers to deposit up to £20,000 each tax year and earn interest tax-free.
Adam Thrower, head of savings at Shawbrook said: “It’s concerning that many are still unaware of what an ISA is and how it can benefit savers.
“The tax implications of savings might not have crossed the minds of many before, but with the current elevated interest rates, it’s now much easier to surpass the tax thresholds which remain frozen. By utilising the £20,000 ISA limits, savers can avoid paying some tax and take advantage of the attractive rates currently on offer.”
Currently, a higher rate taxpayer who saves £10,000 in a leading one-year fixed account (5.2 percent AER) would put them over the personal savings allowance. Similarly, for a basic rate taxpayer, £20,000 in the same account could see them go over the threshold.
Shawbrook warns that savers who may not have previously considered the tax implications of their savings should “take heed” and “proactively assess” the potential impact and possible liability.
Mr Thrower shared five top tips to help people decide on the right account.
Go back to basics
Before making any decisions on where to invest, Mr Thrower suggested people “go back to basics” and check what their current savings rate is.
He said: “You might be shocked to see just how low it is, in fact, our recent research found 24 percent of savers were being paid an average of 2.2 percent on their main savings. If it is low, then check to see what other banks are paying and look to make the switch.”
Coverage is key
Before moving any money to a bank or savings account, Mr Thrower suggested people check that it is protected.
He explained: “Under the Financial Services Compensation Scheme (FSCS) you are covered if a bank or building society fails. If this happens then you can claim up to £85,000 per person back. You can check this on the FSCS website by entering the bank’s name to ensure your money is safeguarded.”
Don’t be put off by a lack of high street presence
Mr Thrower said: “Many of the leading savings providers do not have a high street presence and so, by limiting yourself to a ‘big name’ or only a bank with high street branches, you’re limiting your potential earnings.
“If the bank you’re interested in is protected by the FSCS, and is offering a rate that is much better than your current rate, then make the switch.”
ISA or non-ISA
Another key consideration is tax. Many providers offer individual savings accounts (ISAs) which people can use to save up to £20,000 tax-free per tax year.
Mr Thrower said: “As interest rates are much higher now than in recent history, it doesn’t take much to find yourself nearing the threshold for taxation on your interest income. For those who are near or indeed might go over the threshold, ISAs are a great way of reducing your tax burden.”
Use the right account for you
While some might have a large amount of savings, others might want to use an account for a rainy day fund. Mr Thrower said: “Whatever it is you are saving for, or however much you are saving, choosing the right account is key.
“For those building a rainy day fund, an easy access or notice account might be more suitable, as you can access your money without paying any early withdrawal fees.
“For others who might be saving towards retirement, or have enough cash elsewhere to deal with any emergency expenditure, fixed-rate accounts could be the more suitable route for you and likely to provide better returns than others.”
He added: “There are also no rules about how many non-ISA accounts you have, so you could also consider using a mixture of accounts to best fit your needs.”
