TLDR:
- Savers now face paying tax on accounts with as little as £8,000 due to increased interest rates.
- Higher-rate taxpayers breach personal savings allowance with £8,334 in one-year fixed rate bond.
- Basic-rate taxpayers incur tax on interest on pots of £16,667 or more.
- Higher-rate taxpayers can only earn £500 in interest before being taxed on it.
- Basic rate taxpayers can earn up to £1,000 in interest tax-free.
UK savers are now facing tax bills on accounts containing as little as £8,000, as interest rates have seen a significant increase. Higher-rate taxpayers breach their personal savings allowance with just £8,334 in a one-year fixed-rate bond, while basic-rate taxpayers incur tax on interest earnings on pots of £16,667 or more.
Higher-rate taxpayers can only earn up to £500 in interest before being taxed, while basic-rate taxpayers enjoy a £1,000 tax-free interest allowance. However, additional-rate payers receive no allowance for tax-free interest.
The surge in interest rates has led to the best one-year fixed bond rates exceeding 6%, reducing the amount of money that can be held outside of tax-free ISAs before being subject to taxation. Previously, a higher-rate taxpayer could save over £27,000 without triggering a tax bill, and a basic-rate taxpayer could save over £50,000 with lower bond rates.
Lucinda O’Brien from Money.co.uk advises savers to consider cash ISAs, which offer valuable tax relief. Although easy-access ISA rates average at 2.83% compared to 5.17% in one-year fixed bonds, savers can deposit up to £20,000 per year into an ISA tax-free.
The personal savings allowance was introduced by former chancellor George Osborne in 2016 when interest rates were at 0.5%. Savers needed over £100,000 outside of a tax-free wrapper to trigger a tax bill then. However, the personal savings allowance threshold has not kept up with inflation and remains unchanged. Tax thresholds across the board have been frozen since 2021 and will continue to remain fixed until 2028.
The frozen tax thresholds, coupled with increased interest rates, have contributed to Britain’s tax burden reaching the highest level since World War II. The number of people paying the highest 45p tax rate is expected to double compared to the previous year.
As interest rates rise, UK savers are facing new challenges in managing their savings tax-efficiently. Higher-rate taxpayers need to be cautious of their interest earnings, as even a modest amount in a one-year fixed bond could lead to a tax breach. Basic-rate taxpayers also have limitations, incurring tax on interest earnings on larger pots. The frozen tax thresholds and historical context highlight the need for careful financial planning and consideration of tax relief options like cash ISAs. In this changing economic landscape, making informed decisions and staying informed will be essential for maximizing savings and minimizing tax implications.
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