Local independent financial adviser, Ben Morris of Morris Financial Management, warns savers to be aware of the implications of tax on savings:
At last, the interest rates on savings are increasing but savers should be aware of the tax implications.
Over the past year, interest rates have been climbing as the Bank of England tries to tackle inflation. The Bank of England base rate now stands at 5 per cent and is expected to keep rising.
This is slowly pushing savings rates up and while higher returns for savers are a welcome boost amid the cost of living gloom, it means many people who have paid no tax on their savings interest for several years could find they owe money to HM Revenue & Customs (HMRC).
Currently, basic-rate taxpayers can earn up to £1,000 interest each year free of tax outside of an ISA, higher-rate taxpayers can earn £500 tax-free and top-rate taxpayers get nothing.
However, these limits — known as the ‘personal savings allowance’ — were introduced in 2016, when the Bank of England base rate was just 0.5 per cent.
Back then, 95 per cent of savers paid no tax on their interest — but that’s about to change this year as many more will find they have earned more interest.
Currently, the best rate on a taxable savings account is currently 6.15 per cent — a two-year fixed-rate bond from FirstSave.
That means that £16,262 in savings would tip a basic-rate taxpayer over the level of interest you can earn before tax is due. A higher-rate taxpayer would need only £8,131 in the account for tax to be owed.
Savers who earn more than their personal savings allowance will have the tax owed taken from their incomes if they are registered for PAYE.
Savers still have tax free ISAs as a way of keeping their interest intact. All of the interest you earn in an ISA is tax-free.
The ISA allowance is currently £20,000 a year. Savers who face tax on their interest could consider moving their money into an ISA. Or, consider one of the many other investment opportunities available albeit with tax implications.
An independent financial adviser is ideally placed to evaluate your financial objectives and provide advice on the best approach for your individual circumstances.
For pensions and investment advice contact Ben Morris on 01745 798260 or email HYPERLINK “mailto:ben@morrisfinancial.co.uk”ben@morrisfinancial.co.uk
