It should be a boom for savers. After years of rock bottom interest rates and duff deals, savings accounts are finally worth getting excited about.
With rates exceeding 6 per cent, you could generate a nice tidy income of £100 a month if you had just under £20,000 in the bank. Happy Days.
But now, just as rising savings rates shed a small ray of sunshine on our otherwise sombre household finances, savers are being overwhelmed with hefty tax bills.
At Money Mail, our mailbag is full of correspondence from readers worried about being stung by tax bills on their savings.
Some retirees have to pay taxes on their nest eggs for the first time and countless households don’t know how much they have to pay.
That is why we call on the chancellor to intervene and double the personal savings allowance.
After all, a tax on small nest eggs was never the plan. In fact, when it was introduced in 2016, the personal savings deduction was intended to protect all but the very wealthiest savers from paying any tax on their interest.
When the surcharge was announced in 2015, former Chancellor George Osborne boasted: ‘In one fell swoop we are creating tax-free banking for almost the entire population’.
He believed – and Money Mail agrees – that savers have already paid taxes on their money when they earn it; they wouldn’t have to pay taxes a second time if they saved it.
But since then, the personal allowance has been mired in the mire, while the financial landscape surrounding it has changed almost beyond recognition.
In 2016, the Bank of England base rate was 0.5 percent; today it is ten times higher.
At the time, there were 4.7 million higher or higher rate taxpayers with personal savings of as little as £500 or no allowance at all; today it’s nearly 6.4 million as more and more workers fall into higher tax brackets.
Seven years ago, it would have taken you £75,000 in a top-paying fixed-rate one-year account to breach the surcharge; today you would only need £16,529.
The personal allowance needs urgent adjustment to end unfair tax assessments on ordinary savers in this new world of high rates, high inflation and ever higher taxpayers.
As Anna Bowes, of savings website Savings Champion, puts it: ‘The people who get caught aren’t rich.
Tax burden: just as rising savings rates shed a small ray of sunshine on our otherwise sombre household finances, savers are being overwhelmed with hefty tax bills
They are families putting aside some hard-earned money for a rainy day. They do it cautiously, only to see their savings eaten away, first by inflation and now by taxation.’ Taxing interest means that the attractive savings rates now on offer are not nearly as lucrative as they might seem at first glance.
A 5 percent savings rate looks good at first glance. But you’ll only be pocketing 4 per cent if you’re a basic taxpayer, once you’ve used up your £1,000 personal savings. The taxman takes the rest.
If you are a higher taxpayer, the effective interest you receive on the same account is 3 percent after tax, after you use your personal allowance.
Taxpayers with a supplemental rate would receive only 2.75 percent of their savings in an account that pays 5 percent.
Savers need all the help they can get. After all, even if you have your money in the most generous savings account, it still loses value in real terms.
That’s because inflation is at 8.7 percent — and there’s no savings account that comes close to beating — or even matching it. Tax on savings eats your nest egg faster.
Doubling the personal savings deduction means base rate taxpayers can keep £20,000 in a top savings account without paying a penny in tax. Savers with £50,000 or £100,000 would keep an extra £200 of the interest they earn.
Raising the Personal Savings Allowance to £2,000 won’t make savers rich. It will not protect them from inflation. But it will provide an indispensable helping hand at a time when savers need it most.
It shows solidarity with prudent savers and recognizes their efforts to do the right thing.
r.rickardstraus@dailymail.co.uk
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