UK Edition
Higher-earners risk receiving an unexpected tax bill as soaring interest rates cause them to exceed their annual personal savings allowance for the first time.
A higher-rate taxpayer would need to have only £11,900 in a one-year fixed bond paying today’s top rate of 4.2pc before breaching their personal savings allowance of £500 and having to pay tax on the interest, according to calculations by wealth manager Quilter.
Last year, the same taxpayer could save almost triple that amount – £33,100 – in a bond paying 1.51pc, the top rate at the time, without being taxed.
Meanwhile, basic-rate taxpayers, who have an allowance of £1,000, can now save £23,800 before getting taxed, compared to £66,200 last year. Additional-rate taxpayers do not receive a personal savings allowance.
Few people have paid tax on savings since the personal savings allowance was introduced in 2016, sparking fears some savers will be hit by surprise bills.
Shaun Moore, of Quilter, said: “People now need greater awareness of the personal savings allowance. With rates ratcheting back up, many savers will face breaching this allowance and paying tax on interest for the first time in years.”
Interest earned above the personal savings allowance is taxed at the marginal income tax rate – 20pc for basic-rate taxpayers and 40pc for higher-rate earners.
If the Bank Rate continues its upward trajectory as expected, then the risk of getting taxed will become a growing risk for savers, Mr Moore warned. He urged savers who had not already done so to make use of Isas and utilise the annual tax-free allowance of £20,000 in full if they were able to.
With cost-of-living pressures deepening, Mr Moore said the Government should consider increasing the personal savings allowance to help savers.
"It has been static since 2016," he said, "and with inflation sky high, an adjustment to the limit would offer a welcome helping hand to the UK’s hard-earned savings”.