Brits with more than £3500 stashed in their savings' accounts take note, as you could be due an unwanted letter from HMRC.
There's nothing worse than coming home from work and seeing the dreaded envelope stamped with the logo for HM Revenue & Customs on your doormat, as it usually means one thing and one thing only. You owe tax.
Unlucky.
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However, this warning is less to do with paying tax on your income but instead how much cash you've got stashed away for a rainy day.
Do you pay tax on savings?
No, you're not expected to pay tax on the amount of money you have in your savings but you may be expected to cough up for the amount of interest from the cash you have saved.
According to guidance from HMRC, Brits who sit in the 'basic rate' of Income Tax band can earn up to £1000 on their savings each year.
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For reference on how much you'd need to pass this threshold, Money Saving Expert (MSE) predicts that you would need around £20,000 placed in a 'top easy-access savings account to exceed the allowance' depending on saving rates.
Now £20k is a pretty hefty figure to have lying around in your savings, which means most of you are probably reading this and thinking you're in the clear.
Not exactly.
Does your income impact Personal Savings Allowance?
Yes, as anyone who makes £50,271 or more moves up to the 'Higher rate' Tax band.
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Your Personal Savings Allowance is also slashed once you pass this threshold, coming down from £1000 to £500.
Using the same logic as earlier, you'd now need £10,000 in an instant access savings account to incur the tax each year.
However, this can dip even further if you plan to take advantage of a fixed rate savings account, which locks away your savings for one or more years.
If you're in the higher tax band and decide to use a fixed-term savings account for your cash (which offer an average of 5% of interest, but can be even higher), saving as little as £3,500 across three years could tip you over the threshold.
Tax on personal savings is also paid at the same rate as your income tax, which means anyone earning at least £50,271 would pay 40% tax on any amount over £500.
Which accounts are included in Personal Savings Allowance interest?
Here is a list of bank accounts included in the Personal Savings Allowance interest.
- Bank and building society accounts
- Savings and credit union 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
Brenna Cooper