Interest rate rises could push savers into taxation bracket

Savers have been warned they may become liable to taxation on their savings interest, following a series of rises in interest rates.

The latest interest rate rise in August saw a full half percentage point increase.

Increased payments will be a worry for those with a mortgage or loan, but for savers, it means an increase in their investment as savings rates raise.

It also presents a challenge and can tip savers into the bracket where they have to start paying tax on their interest.

The Personal Savings Allowance (PSA) allows savers to earn up to £1,000 of interest and not have to pay tax on it, depending on their Income Tax band. This reduces to £500 at the higher rate and disappears for the additional rate.

For those with a joint account, interest will be split equally between the account holders. According to HMRC, interest on savings covers:

·        Savings and credit union accounts

·        Bank and building society accounts

·        Unit trusts, investment trusts and open-ended investment companies

·        Peer-to-peer lending

·        Trust funds

·        Payment protection insurance (PPI)

·        Government or company bonds

·        Life annuity payments

·        Some life insurance contracts

The PSA was introduced in April 2016 and means any savings earned won’t be taxed up to a certain limit, but the downside is that in the six years since its introduction, the figure has remained at £1,000.

However, before reaching the £1,000 PSA limit, you would need tens of thousands of pounds in the savings accounts, at current interest rates. Even with some of the higher paying accounts.

A basic tax rate saver would need to have around £30,000 in an account paying 3.35 per cent before coming close to breaching the PSA limit. It is estimated that around 95 per cent of savers don't pay any tax on their savings interest due to the PSA.

Need help and advice on taxation matters? Contact our team today.