Rising interest rates should be excellent news for savers.
Best-buy savings accounts — which are already breaching 6 per cent — could rise further still tomorrow as the Bank of England is expected to increase the base rate to 5.5 per cent in the 15th consecutive increase.
But millions of savers could be in for a nasty surprise. Now they are finally earning a decent amount of interest, the taxman is clawing back an ever-greater proportion of it in the form of income tax.
Interest earned on savings is treated as income and taxed at your marginal rate of income tax.
For basic rate taxpayers, the taxman takes 20 per cent, for higher rate it’s 40 per cent and additional rate 45 per cent.
Limits: Savers have a personal savings allowance, which means they can earn £1,000 or £500 of interest tax-free, for basic and higher rate taxpayers, respectively
Savers all have a personal savings allowance, which means they can earn £1,000 or £500 of interest tax-free, for basic and higher rate taxpayers, respectively. Additional rate taxpayers pay tax on all their interest.
Yet these allowances look increasingly miserly as interest rates shoot up. Savers who have diligently built even modest nest eggs are now getting stung.
Today, a basic-rate taxpayer would breach their allowance with just £16,130 in the best-paying savings account, which is currently a Guaranteed Growth Bond paying 6.2 per cent from NS&I. A higher-rate taxpayer would trigger a tax bill if they had above £8,065 in the same account.
If savings rates rise further in line with another base rate increase tomorrow, savers will need even less in their accounts before they breach their allowance.
Money Mail is calling on Chancellor Jeremy Hunt to double the personal savings allowance to £2,000 to give savers a tax break.
We believe it is unfair that savers with relatively modest nest eggs are seeing their incomes devoured by tax.
Savers should be rewarded — and incentivised — for their prudence and looking after their own financial futures.
Since we launched our campaign in July, scores of readers have been in touch to share their support.
Geoff Dowdall, 76, from Essex, has relied on the income from his savings interest since he retired.
Appeal: We are calling on Chancellor Jeremy Hunt to double the personal savings allowance to £2,000
‘I am an OAP, but I’m suddenly having to pay tax bills on my savings — which I already paid tax on when I earned it,’ he says.
‘That can’t be fair. If I was allowed to keep my interest, I would spend it — which would be good for the economy.’
Christine Watson, 72, from Newcastle, says: ‘The Government gives with one hand and takes with the other.
We’re supposed to be happy that the state pension is rising thanks to the triple lock. But our incomes are still being squeezed because we’re being dragged into paying more income tax, plus tax on savings.’
Readers are also writing in with reams of questions about how the savings tax will work.
We put them to some of Britain’s top accountants — and asked them for their tips on cutting your bill.
Here are four pitfalls to avoid — and three tips to remember — from Robert Salter, a director of tax advisory firm Blick Rothenberg; Dawn Register, a tax partner at BDO; and David Portman, a director at chartered accountants Lubbock Fine.
1. You may get a SHOCK bill in 2026
Savers who are registered for PAYE automatically pay savings tax through an adjustment to their tax code. This includes savers who have an employer or who receive the state pension. Savings providers all inform HMRC of interest you have earned.
Beware though — there is likely to be a lag between when you earn the interest and when you are taxed on it.
If you breach the allowance between April this year and next, the tax will be collected retrospectively through your tax code throughout the year to April 2025.
Be prepared to see your income fall from April as a result. If you’re not registered for PAYE, you will have to settle your tax bill through a self-assessment tax return. In that case, you will pay the bill even later.
For example, you would need to settle the tax due for the 2023 to 2024 tax year by January 31, 2026. You can register for self assessment by calling the HMRC Income Tax Helpline on 0300 200 3300.
2. Prepare to declare savings
If you have an income of more than £10,000 a year from savings, dividends and investments, you need to complete a self-assessment tax return.
For the tax year which ended on April 5 this year, you will need to register with HMRC by October 5 and submit the return and pay any tax due by January 31, 2024.
However, you may need to submit a return even when there is no tax to pay. Some people can earn up to £18,570 savings interest tax free (see tip 3 below).
However, you may still have to file a return. Fail to do so and you could face a fine.
3. Watch out for multi-year bonds
Savers rely on multi-year bonds to lock in a good interest rate for two, three or five years.
However, few people realise that some bonds pay interest in a way that will lead to a significantly higher tax bill than others.
That is because some roll up all of the interest earned each year and pay it all at the end of the bond term.
If you have an income of more than £10,000 a year from savings, dividends and investments, you need to complete a self-assessment tax return
Savers with this type of bond are treated as if they have received all of their interest within one tax year and are therefore more likely to breach their personal savings allowance for that year.
Others are treated as if annual interest is paid every year rather than all at once — even if you can’t access the interest until the end of the term.
In this case, you can take advantage of your personal savings allowances across multiple years, therefore reducing your overall tax bill.
If you’re taking out a multi-year bond, make sure you check with your provider which one you’re getting and work out what impact it could have on your bill.
4. Beware of the wrong amount
Until recently, few savers would have breached their personal savings allowance. But within a year, the amount of tax that savers will pay will almost double from £3.4 billion to £6.6 billion this year, wealth platform AJ Bell estimates.
Accountants warn that this could prove an administrative nightmare for HMRC. The system largely relies on HMRC correctly adjusting millions of tax codes — and it is not renowned for its accuracy in this department.
Therefore, when you get a letter or notification from HMRC that it has changed your tax code, make sure to check it very carefully.
In some cases, it may change your tax code more than once in a single tax year.
When your tax code is changed, HMRC should send you details of how it came to its decision and how much it believes you are receiving in interest.
Review this notification to ensure you agree with HMRC’s calculation — and let it know if you do not.
Couples with joint accounts should be particularly alert. That is because HMRC should assume that each account holder receives only half of the interest.
However, this system is open to mistakes so if you are in this position, you should make sure that you are only being taxed on half of the interest in a joint account.
And top tips to cut your bill
1. Make the most of Isas
Individual Savings Accounts (Isas) are much like any other type of cash savings account, except your money is completely sheltered from tax.
You can put up to £20,000 into Isas every tax year. Isas tend to pay slightly lower rates than other savings accounts.
The current best-buy rate is 5.79 pc on a two-year fix with Kent Reliance. However, you may be better off accepting a lower rate if it keeps your tax bill under control.
Haven: You can put up to £20,000 into Isas every tax year. Isas tend to pay slightly lower rates than other savings accounts
2. Cut down your bill as a couple
If you are a higher or additional rate taxpayer, and your partner is a basic rate taxpayer, you could cut your combined tax bill by transferring your savings into your partner’s name.
There are also two further tax reliefs for couples that may help. Only those who are married or in a civil partnership are eligible.
The first is the Marriage Allowance. If one of you has an income below the personal income tax allowance of £12,570, and the other is a basic rate taxpayer, you can transfer 10 per cent of the personal allowance to the higher earner. This can save up to £252 in tax per year.
The second is the Married Couple Allowance, which is available if one of you is born before April 6, 1935.
The amount of tax you can save is between £401 and £1,037 per year, depending on your circumstances. Visit the website: gov.uk/married- couples-allowance.
3. Earn more if you have a low income
If you have no other income, you can earn up to £18,570 in interest before paying any tax.
This is made up a combination of three allowances: your £12,570 Personal Allowance, your £1,000 Personal Savings Allowance and your £5,000 starting rate for savings.
Go to gov.uk/apply-tax-free-inter est-on-savings for more information on how these allowances work.
- Do you have a savings tax question? Email firstname.lastname@example.org
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.