HMRC warning for anyone with over £3,500 savings in their bank account
Savers who have accumulated a nest egg of £3,500 or more are being warned that they might be caught off guard by an unexpected tax demand from His Majesty's Revenue and Customs (HMRC).
HMRC has the capability to automatically identify interest on savings accrued in your bank account, and crossing a specific threshold means an automatic notification for an additional tax charge is dispatched.
The current rules permit an individual to earn up to £1,000 in savings interest annually without attracting tax under the Personal Allowance. Yet, this allowance only applies to individuals earning below £50,270. For those earning £50,271 or more, their Personal Savings Allowance is significantly reduced to just £500.
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Depositing £3,500 into a fixed savings account at a 5 per cent rate over three years will generate an interest surpassing £500. In fixed accounts, interest is "crystallised" and paid out at the time the interest is due, reports The Express.
So, if you've locked away your savings for three years, upon conclusion of that term, you'll receive the entire sum at once. If the payout exceeds £500, for instance, slightly over £500, it means you've breached your Personal Savings Allowance, ignoring any other potential interest from additional accounts anticipate communication from HMRC.
And for those in the higher-income bracket, the tax hit is heavier, for every pound over £500, 40p is taxable instead of 20p. Therefore, even a mere £100 over the allowance could translate to a £40 charge. There are numerous other types of income that also contribute towards your Personal Savings Allowance.
According to the Government, these are:
Bank and building society accounts
Savings and credit union 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
HMRC notes: "If you go over your allowance, you pay tax on any interest over your allowance at your usual rate of income tax. If you're employed or get a pension, HMRC will change your tax code so you pay the tax automatically.
"To decide your tax code, HMRC will estimate how much interest you'll get in the current year by looking at how much you got the previous year."