New tax menace could take a painful bite into YOUR cash

More than six million savers are facing tax bills on their interest for the first time in seven years – and many could be forced to pay hundreds of pounds. The much-ignored tax is expected to hit millions of savers over the next five years.

All savers have a personal allowance, with which you can earn tax-free interest on your savings. Base rate taxpayers can earn up to £1,000, and higher rate taxpayers can earn £500. Payers do not have a deduction and therefore pay tax on all their interest.

For years, savers earned so little interest that their personal savings deductions were generous enough to ensure that only the very wealthiest ever paid taxes.

But as interest rates rise, even savers with relatively small nest eggs can exceed their payout. Older savers, who depend on their savings for an income, are particularly at risk of being confronted with tax bills.

Sarah Coles, of wealth platform Hargreaves Lansdown, says that while higher interest rates are welcome for beleaguered savers who have been dealing with ‘miserable rates’ for more than a decade, ‘they will push more savers to pay taxes for the first time. since the introduction of the personal allowance in April 2016.’

According to wealth platform AJ Bell, savers paid £3.4 billion in tax on their savings last year. That is almost three times as many as last year.

Why are tax bills growing?

Savings rates are at a 14-year high, with the best one-year fixed bond paying out 5.25 percent (see best buy tables – page 66). That means a base rate taxpayer earning less than £50,270 would be in breach of his allowance if he had anything over £20,000 in savings in a top-paying account.

A higher rate taxpayer, earning between £50,271 and £125,140, ​​only needs to have just over £10,000 in the same account to breach their allowance. A taxpayer with an additional rate, earning more than £125,140, ​​would pay tax on all their savings interest.

Just a year ago, savers could have twice as much credit as they do now without having to pay taxes. That’s because the highest available rate was only 2.4 percent.

When the personal savings deduction was first introduced in 2016, a basic rate taxpayer could keep as much as £68,966 in a top-paying account without paying a penny in tax, according to Anna Bowes, of Savings Champion. The highest paying account at that time paid only 1.45 percent interest.

Once you exceed your personal allowance, you pay tax on the interest at your income tax rate. That is why taxpayers pay 20 percent in the basic rate, 40 percent in the higher rate and 45 percent in the supplementary rate.

According to Hargreaves Lansdown, UK households have £13,954 in conventional savings accounts. This would be more than enough to violate the deduction if it is mostly owned by a higher or higher rate taxpayer.

The amount of tax owed by savers will continue to rise as savings interest rates rise. A growing number of workers will also see their bills rise as they are dragged into a higher tax bracket. Income tax thresholds are frozen until at least April 2028. As a result, a further 2.6 million workers will become senior taxpayers and see their personal savings cut in half to £500.

– Check out the best easily accessible savings rates here.

How are you billed?

If you are employed or receiving a pension, HM Revenue & Customs will automatically change your tax code and deduct the tax from your earnings.

To calculate your code, it will estimate how much interest you will receive in the current year by looking at the amount you got last year.

If you file a tax return yourself, for example if you are self-employed, you must state the interest earned on savings on your form.

If none of the above apply, your bank or building society will tell the IRS how much interest you received at the end of the tax year. HM Revenue & Customs will then inform you if you have a bill to pay.

6 ways to lower your taxes

1) Store your savings in an ISA

The easiest way to protect your savings for tax purposes is to place them in a Private Savings Account (Isa). This is much like other types of savings accounts, except that all interest earned is tax-free. You can deposit up to £20,000 into an Isa each tax year.

ISAs generally pay slightly less interest than regular savings accounts. The average one-year fixed rate Isa pays 3.95 percent, while the equivalent standard account pays 4.18 percent.

However, if you are about to exceed your personal savings, you might be better off taking a slightly lower rate and opting for an Isa. For example, a higher rate taxpayer with £15,000 in savings would earn £592.50 in the Isa above, but £576.20 in the standard savings account, after £50.80 in tax was deducted.

Mail on Sunday reader Peter Vincent, from Tunbridge Wells, realized last week that unless he acted quickly, he could face a tax bill on his savings for the first time this year. He would have exceeded his personal savings of £1,000 by £400, which would have left him with an £80 tax bill.

However, after talking to his son-in-law, the 78-year-old opened a one-year fixed rate Isa with Nationwide, paying 4.1 percent, and transferred his savings. Peter’s money is now shielded from taxes.

He will also earn more interest because his Isa pays a better interest rate than the accounts on which he previously had his savings. These were an HSBC Premier Savings that paid just 1.6 percent and a National Current Account that paid 3.2 percent.

“We heard about this savings tax a long time ago, but everyone has forgotten it exists because the rates have been so low for so long,” he says. “It’s so easy to fall into the trap of leaving your savings where they are.”

Millions of savers like Peter are waking up to the value of Isas. A record £11 billion was paid to them in April. In the same month, savers withdrew £4.5bn from standard instant access savings accounts, which are not protected from tax.

– Check out the best fixed rate savings deals here.

2) Apply for extra allowances if you have a very low income

UK adults have a personal allowance, which allows people to earn up to £12,570 tax free.

If you have not used up this allowance through your wages, pension or other income, you can use it for interest on your savings.

This is in addition to your personal savings deduction.

If you earn less than £17,570 you can also accrue up to £5,000 in interest without paying tax on it. This fee of £5,000 is known as your starting savings rate.

To see how these three allowances work together to reduce your tax bill, visit: gov.uk/apply-tax-free-interest-on-savings

3) Give money to your partner

If you’re in a higher tax bracket than your spouse, you can lower your tax bill by putting your joint savings in his or her name.

A base rate taxpayer and a partner with a low or non-earning income can jointly receive a personal savings deduction of £7,000.

If you keep your savings in a joint account, the interest is split equally between the account holders.

4) Use Premium Bonds

Premium Bonds with National Savings and Investments (NS&I) can be a good hiding place for your money if you are afraid of exceeding your personal savings.

All prizes are paid out tax-free and do not count towards your savings or income tax deduction. You can put anything from £25 to £50,000 in Premium Bonds and stand a chance to win up to £1 million. The current price percentage is 3.3 percent. However, there is a chance that you won’t win anything.

Savers deposited £3.5bn into NS&I accounts in March alone – nearly double the amount deposited in February. A further £1.6bn went into these accounts in April.

But beware: interest on the NS&I direct savings account and income bonds do count towards your personal allowance.

5) Keep your child’s savings in a Junior Isa

Children have an even lower personal allowance than adults. Any savings interest earned above £100 a year is taxed as if it were owned by the parent. This is to prevent parents from evading tax by putting their own savings in their child’s name.

This means that if a parent has already taken their own personal savings deduction, their child’s savings will be taxed at the parent’s tax rate once they earn more than £100 in interest.

If you’re saving for a child, you can opt for a Junior Isa, which can save you up to £9,000 a year in tax.

6) Choose a multi-year bond that pays interest annually

Some fixed-rate multi-year bonds pay interest every year, while others pay all of the interest at maturity. If you’re at risk of going over your personal savings, choose the former.

For example, you can pay less tax each year with your personal allowance, instead of paying once at the end of the term.

For example, a base rate taxpayer who deposits £15,000 into a five-year fixed rate account and pays a top rate of 5.1 per cent would earn £4,235 in interest. If the interest were to be paid every year, they would remain below the personal deduction limit and would not have to pay tax.

But if it were all paid out in one payment, they would have no tax bill for four years and then a bill of £647 in the fifth. A higher rate taxpayer would pay £800 more in tax if they received all of the interest at once rather than annually.

According to Revenue & Customs, if you can ask to take the interest each tax year, the income is considered to have been received annually, even if you don’t receive the payments until the end of the term. However, for deals where you can’t withdraw the interest each year, you’ll likely be taxed all at once at the end of the bond’s term.

Bowes, of Savings Champion, says: ‘It can be difficult to know for sure what type of bond you’re opening, but it can have a huge impact on how much tax you have to pay.

“The problem is that you may need to get clarification from a tax professional as this can be quite a complicated area and it’s not always immediately obvious if it’s due at maturity.”