A number of banks have been offering attractive savings rates for both new and existing customers
Savers across the country could face an unexpected tax bill depending on their savings over the years. Several banks have been offering appealing savings rates for both new and existing customers, which may be even more enticing following the recent drop in the Bank of England’s (BoE) base rate to 4.50%.
However, smart savers should take some time to calculate their long-term interest earnings as they might end up losing a significant amount in tax to HM Revenue and Customs (HMRC). Official guidance states that most people can earn interest on their savings without paying any tax.
But if your interest earnings are high enough, you will need to pay tax. The tax amount depends on several factors, including how much you exceed your Personal Allowance, your starting savings rate, and your Personal Savings Allowance.
Personal Allowance
The Personal Allowance is the income you can earn before you need to pay tax – currently set at £12,750 a year for most people. You can use your Personal Allowance to deduct tax from your savings interest, but only if you haven’t already used it on other income sources like wages or pension.
Starting rate for savings
The starting rate for savings allows you to earn up to £5,000 of interest before you need to pay tax on it. However, this starting rate will decrease once you start earning a certain amount of income from other sources.
If your income is less than £17,570, you’ll receive the maximum starting rate of £5,000, with every £1 of other income above your Personal Allowance reducing the starting rate by £1. Moreover, once your income exceeds £17,570, you will no longer be eligible for the starting rate.
Personal Savings Allowance
Depending on your Income Tax band, you could earn up to £1,000 of interest without having to pay any tax on it. If you’re on a Basic tax rate, you’ll have a Personal Savings Allowance of £1,000, while a Higher rate will receive £500 and an additional rate will receive no Personal Savings Allowance.
Full details on how you can determine whether you will pay tax on interest this tax year can be found here.