New tax threat could hurt your cash

Threat: More than 6 million savers face tax charges on interest for first time in seven years

Threat: More than 6 million savers face tax charges on interest for first time in seven years

More than 6 million savers are facing tax charges on interest for the first time in seven years, and many could be forced to pay hundreds of pounds. The largely neglected tax is expected to hit millions more savers over the next five years.

All savers have a personal allowance that allows them to earn tax-free interest on their savings. A basic rate taxpayer can get up to £1,000 and a high rate taxpayer he can get £500. There is no deduction for taxpayers with additional tax rates, so they pay tax on all interest.

For years, savers earned so little interest that personal savings lines were generous enough that only the wealthiest people ever would pay taxes.

But if interest rates rise, even savers with relatively small nest eggs could run over their limits. Older savers, who depend on savings for their income, are particularly at risk of rising taxes.

Sarah Coles of wealth platform Hargreaves Lansdown says higher interest rates are welcome for distressed savers who have had to endure “disastrous interest rates” for more than a decade, but “saving more For the first time, people will be forced to pay taxes.” Since the personal savings allowance was introduced in April 2016.

Savers paid £3.4 billion in taxes on their savings last year, according to wealth platform AJ Bell. This is about three times the number from the previous year.

Why are taxes increasing?

Savings rates are at a 14-year high, with top one-year fixed bond payouts at 5.25% (see Best Buy table – page 66). This means that a basic rate taxpayer earning less than £50,270 and having just over £20,000 in savings in the highest account would be in breach of the deduction.

A high rate taxpayer with income between £50,271 and £125,140 would violate the deduction by just holding just over £10,000 in the same account. Additional rate taxpayers earning over £125,140 will pay tax on all of their savings interest.

Just a year ago, savers could have doubled their current balances without paying taxes. That’s because the highest interest rate available was just 2.4%.

According to Savings Champion Anna Bowes, when the Personal Savings Allowance was first introduced in 2016, basic rate taxpayers would have to pay no tax and keep up to £68,966 in their top accounts. It is said that The highest interest account at the moment she was paying only 1.45% interest.

If you exceed your personal savings limit, you will pay tax on interest at the income tax rate. Therefore, a basic rate taxpayer pays 20 percent, a higher rate taxpayer pays 40 percent, and a supplemental rate taxpayer pays 45 percent.

UK households have £13,954 in traditional savings accounts, according to Hargreaves Lansdowne. This is more than enough to violate the deductible if it is held primarily by high or surcharge taxpayers.

As the savings rate rises, the amount of tax payable by savers will continue to rise. The number of workers is also growing and will be dragged into higher tax rates, causing bills to spiral. The income tax base will be frozen until at least April 2028. As a result, another 2.6 million workers will become high taxpayers and the personal savings quota will be cut in half to £500.

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How will I be billed?

If you are employed or receive a pension, HM Revenue & Customs will automatically change your tax code and deduct tax from your income.

To calculate the code, look at the amount you received last year to estimate the amount of interest you will receive this year.

If you are preparing a self-assessment tax return, for example if you are self-employed, you must report interest earned on your savings on the form.

If none of the above apply, your bank or building association will tell the tax office the amount of interest paid at the end of the tax year. HM Revenue & Customs will then notify you if there is an invoice for payment.

6 ways to reduce taxes

1) Store your savings in Isa

The easiest way to protect your savings from taxes is to keep them in a Personal Savings Account (Isa). This is very similar to other types of savings accounts, but all interest earned is tax-free. You can pay the ISA up to £20,000 per tax year.

ISAs tend to pay slightly less interest than standard savings accounts. The average 1 year fixed rate Isa payout is 3.95%, while the equivalent standard account payout is 4.18%.

However, if you are at risk of going over your personal savings limit, you may be better off choosing an ISA with a slightly lower interest rate. For example, if he is a high tax taxpayer with savings of £15,000, on the above Isa he would earn £592.50, but after taxes of £50.80 have been deducted, on a standard savings account he would be £576.20. increase.

Mail on Sunday reader Peter Vincent of Tunbridge Wells realized last week that his savings would be taxed for the first time this year if he didn’t take immediate action. He will be £400 over his personal savings limit of £1,000, which will result in £80 in taxes.

But after a conversation with his son-in-law, the 78-year-old opened a one-year, fixed-rate Isa Nationwide with a payout of 4.1% and transferred his savings. Peter’s money will be protected from taxes.

Also, his Isa pays a higher interest rate than his previous savings account, so he earns more interest. These were just 1.6% on HSBC Premier Savings payments and 3.2% on Nationwide checking account payments.

“We heard about this savings tax a long time ago, but interest rates were so low for so long that everyone forgot it existed,” he says. “It’s very easy to fall into the trap if you leave your savings alone.”

Millions of savers like Peter are awakening to the value of Isas. A record £11 billion was paid to them in April. In the same month, savers withdrew £4.5bn from standard instant access savings accounts that were not tax protected.

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2) Claim additional benefits for very low-income earners

UK adults have a personal allowance that allows them to earn up to £12,570 tax-free.

If you haven’t used up this allowance with your salary, pension or other income, you can use it as interest on your savings.

This is paid in addition to the personal savings allowance.

If your income is less than £17,570, you can accrue interest up to £5,000 without paying tax. This £5,000 allowance of his is known as the starting rate of savings.

To see how these three benefits work together to reduce your tax burden, visit gov.uk/apply-tax-free-interest-on-Savings.

3) Give money to your spouse

If you are in a higher tax bracket than your spouse, you may be able to save tax by holding joint savings in your spouse’s name.

Basic rate taxpayers and low-income or non-income spouses are entitled to a combined personal savings allowance of £7,000.

If you hold your savings in a joint account, the interest will be split evenly between the account holders.

4) Use premium bonds

If you’re scared of breaking your personal savings line, National Savings Investment Premium Bonds (NS&Is) are a great place to store your cash.

All prizes are paid tax-free and do not count toward savings or income tax deductions. You can invest in premium bonds from £25 to £50,000 and have the chance to win up to £1 million. The current win rate is 3.3 percent. However, it’s also possible that you won’t get anything.

Savers poured £3.5 billion into NS&I accounts in March alone. This is almost double what was paid in February. A further £1.6 billion was deposited into these accounts in April.

But be careful. Interest earned on NS&I Direct Savings Accounts and Income Bonds counts toward your Personal Savings Facility.

5) Store your child’s savings in Junior Isa.

Children’s personal savings quotas are even lower than those of adults. Savings interest over £100 per annum is taxed as if it belongs to the parent. This is to prevent parents from evading taxes by putting their savings in their child’s name.

This means that if a parent is already using their own personal savings facility, as soon as the child’s savings exceed £100 in interest they will be taxed at the parent’s tax rate.

If you’re saving for your children, you can opt for Junior Isa, which protects up to £9,000 of your annual savings from taxes.

6) Choose multi-year bonds with annual interest payments

Some multi-year fixed-rate bonds pay interest annually, while others distribute all interest at the end of the period. If you risk breaking your personal savings line, choose the former.

That way, you can use your personal savings line to reduce your taxes each year, rather than just once at the end of the period.

For example, a basic rate taxpayer who deposits £15,000 in a five-year fixed rate account and pays a maximum interest rate of 5.1 per cent would earn £4,235 in interest. If the interest is paid annually, it will stay below your personal savings limit and you won’t have to pay taxes.

However, if paid in full at once, there would be no tax bill for four years and a £647 bill for the fifth year. A high rate taxpayer would pay £800 more in tax if he took the interest all at once instead of yearly.

According to HM Revenue and Customs, if you can claim interest for each tax year, your earnings will be considered received each year, even if you don’t receive payment by the end of the year. However, for transactions that do not receive annual interest, they may be taxed all at once at the end of the life of the bond.

Savings Champion Bowes said, “It can be hard to be sure what kind of bond you’re opening, but it can have a big impact on the taxes you’ll have to pay.” says.

“The problem is you may need to get clarification from tax experts, as this is a very complex area and it is not immediately clear whether it will be paid only at maturity. .”

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