Interest rates on your savings have been terrible.
Now, you can actually get a return on your cash savings at the bank.
There is one problem.
For the first time in a long time, tax might be due on your interest.
Rates of over 5% are now available. That could give you an annual £1,500 return if you have £30,000 in savings.
What tax is due?
The government instructed banks to start paying interest gross (without tax deducted) from April 2016 and introduced the ‘personal savings allowance’. This is the amount of interest you can receive without paying tax.
For most of us, our personal savings allowance comfortably covered all interest received … until now.
Income tax is due on any interest received above your personal savings allowance.
The amount of your personal savings allowance depends on your tax rate. Worked examples using interest received of £1,500 (equivalent to 5% on £30,000 savings) are below.
|Which rate taxpayer?
|Personal savings allowance
|Basic rate (20%)
|Higher rate (40%)
|Additional rate (45%)
How is the tax collected?
The tax will be collected via your tax return, or by changing your tax code from your salary or any pension income you have. If you have no PAYE income and don’t complete a tax return, you may need to start doing a tax return.
What can you do about it?
More tax is not always a bad thing.
More tax = More income = More money in your pocket.
However, there are 3 things you can do to reduce tax due on your savings interest.
- Use your ISA allowances.
Savings interest is tax free in an ISA wrapper. You can contribute a maximum of £20,000 into an ISA within the 2023/24 tax year. ISA savings interest rates may be marginally lower than other offers, but the tax saving could mean they’re a good option for you.
- Consider NS&I Premium Bonds
NS&I Premium Bonds are a form of cash savings account. Savings are instant access. Instead of a guaranteed interest rate, you are entered into a monthly prize draw. Prizes are tax free, and the overall prize rate is similar to a competitive interest rate. The maximum you can hold in Premium Bonds is £50,000 per person.
- Hold your cash with lower rate taxpayers … if you’re married (or very trusting!)
Holding your cash savings in the name of an individual who is a lower rate taxpayer can save tax. if you’re a married couple, you can gift to each other with no tax implications. By holding cash savings with a basic rate taxpayer rather than a higher or additional rate taxpayer, you can save income tax on savings interest.
You could have too much cash …
If your savings interest is building up, you could be holding too much cash.
You should hold cash savings for emergencies and to fund any short-term objectives. Any more than this and you could be missing out on additional return available from investing your money for the long-term.
If you’d like to discuss what the right level of cash savings is for you, or how you can save tax, please don’t hesitate to book a call below or send me an email.