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HMRC Savings Tax: Are You Facing an Unexpected Tax Bill?
Millions of UK savers could be facing unexpected tax bills this year, thanks to rising interest rates and the impact of "fiscal drag." Coventry Building Society warns that the number of people affected is set to dramatically increase, highlighting the urgent need for savers to understand their tax liabilities before the April 5th tax year deadline.
Understanding the Personal Savings Allowance (PSA)
The PSA, introduced in 2016, allows basic-rate taxpayers to earn up to £1,000 in savings interest tax-free, while higher-rate taxpayers can earn £500 before tax is due. This allowance applies to interest from various sources, including bank and building society accounts, unit trusts, and more. Crucially, interest earned within ISAs remains tax-free.
The Impact of Fiscal Drag
Fiscal drag occurs when tax thresholds remain unchanged while incomes rise due to inflation. This pushes more people into higher tax brackets, reducing their PSA and leading to unexpected tax bills. Coventry Building Society estimates that 5.9 million additional taxpayers will be affected this year, rising to 7.7 million by 2027/28. This year alone, 2.2 million more individuals will be paying higher-rate tax, effectively halving their PSA.
Protecting Your Savings
Several strategies can help protect your savings from unnecessary tax. Maximising your ISA allowance (£20,000 annually) is a key step, offering tax-free growth on your savings. If you've already maxed out your ISA, consider tax-efficient investments like Premium Bonds (which don't affect your PSA).
However, be aware that interest earned on fixed-term accounts is "crystallised" at the end of the term, meaning it's all counted towards your PSA in that tax year. Even seemingly small amounts in a fixed-term account over several years can unexpectedly push you over the threshold.
What to Do Now
With the tax year-end fast approaching, it's crucial to:
- Review your savings accounts: Calculate your total interest earned this tax year from all sources (excluding ISAs).
- Check your PSA: Determine if you've exceeded your allowance.
- Consider tax-efficient options: Utilize your ISA allowance or explore other tax-advantaged savings.
- Act before April 5th: Make any necessary adjustments to your savings strategy before the tax year ends.
Ignoring HMRC Savings Tax Could Be Costly
HMRC can automatically detect interest earned on savings accounts. Failing to account for interest exceeding your PSA could result in significant tax bills and penalties. Don't wait for a surprise tax bill – take proactive steps to manage your savings tax efficiently.
