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Watch out. Good savings rates could tip you into extra tax!

Jasmine Birtles 10th Nov 2023 No Comments

Reading Time: 3 minutes

If you have savings, now is a good time for you and your money. Interest rates on even flexible accounts are looking a lot healthier. You can get just short of 6% on some accounts which hasn’t been seen since before the 2008 financial crash.

But there’s always a catch isn’t there? The catch now is that with this extra interest you could easily be caught in the trap of savings tax. Here are the facts. You may like to move some of your cash before it gets taxed.


What are the tax rates?

The tax rates that apply to savings income depend on what income tax you pay generally.

If your taxable savings income falls within the basic rate band after you have paid tax on your salary, benefits, rental income etc, then you will normally pay tax at 20%.

The basic rate band for 2023/24 is £37,700, which means that you’ll probably pay basic rate tax up to £50,270. After this higher rate tax of 40% is payable and the Additional rate of 45% above £125,140 (Scottish rates are different).

However, the ‘personal savings allowance’ means

  • Basic rate taxpayers can earn £1,000 of interest in 2023/24 before paying tax
  • Higher rate taxpayers have a lower allowance of £500.
  • Additional rate taxpayers don’t receive any personal savings allowance.
  • There is also an extra ‘starting rate’ for savings, which is a 0% rate of income tax for savings income of up to £5,000 for those with taxable income below £17,570 in 2023/24. You’ll only get the full starting rate amount if your income is up to the personal allowance of £12,570.

How much tax will you have to pay on your savings?

Rob Morgan of investment platform Charles Stanley says that “some people do not realise that if your income from savings and investments is over £10,000 you automatically need to register for Self Assessment. Others will have to arrange to pay tax on their savings that fall outside of the various allowances.”

For many people this can done automatically. If you’re employed or you get a pension, HMRC will work out how much interest you’ll get and change your tax code.

If you’re not employed, do not get a pension or do not complete Self Assessment, your bank or building society will tell HMRC how much interest you received at the end of the year. HMRC will then tell you if you need to pay tax and how to pay it.

What counts towards the personal savings allowance?

Income from certain investments can count towards the allowance including

  • unit trusts open-ended investment companies where income is classed as interest rather than dividends,
  • government bonds (gilts),
  • corporate bonds,
  • purchased life annuities
  • some life insurance contracts.

However, savings and interest-bearing investments in tax-free accounts like Individual Savings Accounts (ISAs) and some National Savings and Investments accounts do not count towards the allowance.

Interest on fixed savings accounts

It’s worth knowing that if you opt for a fixed savings account with a term longer than one year, you’re taxed at the point you earn interest.

For example, say you opt for a two-year fixed savings account that pays interest at maturity  (so at the end of the 2nd year). The tax you pay will depend on the interest paid out to you after 24 months.

How to cut down on tax

Really the best way is to put as much of your savings and investments as possible into ISAs and pensions in order to cut down your tax liability.

You can put up to £40,000 a year into pensions and up to £20,000 a year into ISAs.

Ideally ISA and pension money should be in stocks and shares as they tend to do best in the long-term. But as Cash is doing well right now you could open Cash ISAs instead for the moment and then move them over to equities once the interest rates go down (as they are likely to do at some point).

NS&I did have some market-beating savings accounts until recently but they were clearly too popular and were pulled fairly quickly after being introduced. However, it’s worth looking at the rates they offer currently to see if, with the tax advantage, they would be good for some of your cash savings at least.





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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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