HMRC warning over £1,000 limit as you could get surprise tax bill
Savers have been alerted that they could face a surprise tax bill if they go over an important HMRC allowance. Pete Lewis, senior savings manager at Yorkshire Building Society, highlighted the growing risk as more individuals breach the threshold for paying tax on their savings.
He said: "With frozen thresholds and higher interest rates, more accounts are breaching the Personal Savings Allowance limit. Basic-rate [income] taxpayers can earn up to £1,000 in interest tax-free, but exceeding this can result in unexpected tax bills."
Higher-rate taxpayers only receive a £500 allowance and additional rate payers get none. The tax rate on interest follows your income tax band, being 20% for basic, 40% for higher, and 45% for additional rates.
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To safeguard savings from tax, Mr Lewis suggests utilising ISAs. He explained: "If you haven't already, consider topping up your Individual Savings Account (ISA) before the end of the tax year. You can save up to £20,000 tax-free each year."
This can be spread across various ISA types, including cash, stocks and shares, innovative finance, and lifetime ISAs. Mr Lewis also pointed to a way that some savers could boost their interest earnings significantly.
Data gathered by consultancy firm CACI for Yorkshire Building Society revealed that at the end of last year, there was £362billion in accounts with interest rates of 1% or less. The study also found nearly 13 million current accounts in the UK have balances over £5,001, with an average balance of £23,600.
Mr Lewis remarked: "If these people moved their balances into an easy access account they could be earning over £1,000 more in interest." With several providers currently offering rates of 4.7% or higher for easy access accounts, depositing £23,600 in such accounts would yield an annual return of £1,109.20 or more.
Amy Knight, a personal finance expert at NerdWallet UK, speculated that the base interest rate might fall below four percent by the close of this year, down from its current 4.75 percent. She said: "People who have survived the cost of living crisis without depleting their savings should look to secure a fixed-rate saving account now.
"By locking in higher rates for two years or more, your savings will be protected against future decreases." Ms Knight also issued a warning for savers about withdrawal penalties, stating: "Remember to think carefully about when you’ll need to withdraw the money, as many providers reduce the amount of interest they pay after a certain number of withdrawals.
"Holding savings in a range of instant access, easy access and longer-term fixed accounts is a good way to benefit from higher rates while leaving some cash within reach for emergencies or financial milestones you’re likely to hit in the near future."