Consider moving some of your savings to a best-buy ISA
Tax may be due on the interest that your savings earns, cautions Paul Lewis
If you have more than around £25,000 in savings, you may find that tax is due on the interest it earns. For taxpayers, the first £1,000 of savings interest is normally tax-free. But that amount has not been increased since it was introduced seven years ago – when interest paid was barely a third as much as is paid now. Over the last couple of years interest rates fell to 0.5 per cent or even less, so earning £1,000 interest on your savings was a distant dream for most!
You could safely have £100,000 or more earning interest tax-free. But now, with rates on instant-access accounts topping 3.5 per cent, and 4.5 per cent on fixed-term savings, much lower sums in your accounts will hit that £1,000 tax-free limit.
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Currently the best easy-access account is from Chip (part of ClearBank), which pays 3.55 per cent. So the interest on £28,169 would be £1,000, using up all your tax-free allowance. A best-buy one-year bond from Oxbury at 4.54 per cent would earn you £1,000 in the year on just £22,026. If your savings are more than that, you would probably find tax was due on some of the interest. And if you pay higher-rate tax, the personal savings allowance is halved to just £500. So you can have just half those amounts before tax is due.
Banks and building societies inform HM Revenue & Customs about the interest they pay to you. HMRC should then adjust your tax code so that any tax due is collected from your taxable earnings or pension. If you fill in a self-assessment form you must declare all the interest earned on that. However, if you are not a taxpayer already or your other income is below £17,570 you can earn more than £1,000 interest without paying tax (it’s called the starting rate for savings), and up to another £5,000 savings interest is tax-free with the £1,000 personal savings allowance on top of that.
The calculation is a bit fiddly but you can see the details by searching gov.uk for “tax on savings interest”. If you’re in danger of paying tax on your interest, consider moving some of your savings to a best-buy ISA where all interest is paid tax-free; check rates at savingschampion.co.uk.