Rising interest rates and fiscal drag are pushing millions of UK savers into higher tax brackets, exceeding their Personal Savings Allowance. Maximize ISAs and review savings before the April 5th tax deadline to avoid unexpected tax bills.


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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.

FAQ

The PSA is the amount of savings interest you can earn each tax year tax-free. The amount varies depending on your tax band (e.g., ÂŁ1,000 for basic-rate taxpayers). If your interest exceeds your PSA, you'll pay tax on the excess.

Fiscal drag is when inflation pushes your income into a higher tax bracket without a corresponding rise in your salary. Higher interest rates, combined with inflation, can mean your savings income pushes you over your PSA.

An ISA (Individual Savings Account) is a tax-advantaged savings account. Interest earned within an ISA is usually tax-free, up to your ISA allowance. This helps avoid exceeding your PSA and paying tax on your savings interest.

Review your savings interest earned this tax year. If it exceeds your PSA, you may owe tax. Maximize your ISA contributions if you haven't already. Seek professional financial advice if you're unsure about your tax obligations.

Visit the official HMRC website for detailed guidance on savings allowance, tax rates, and deadlines. Consider consulting a financial advisor for personalized tax planning advice to optimize your savings and minimize your tax liability.

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