Uh Oh! Unexpected Tax Bills on Your Savings?
Millions of us in the UK could be facing a nasty surprise this year: unexpected tax bills on our savings. Thanks to those pesky rising interest rates and something called "fiscal drag," it's becoming a bigger problem than ever. Coventry Building Society is warning that things are about to get seriously worse – so it's time to pay attention!
Understanding Your Savings Allowance – It’s Not as Simple as it Sounds
Back in 2016, the government introduced a Personal Savings Allowance (PSA). Basically, it lets basic-rate taxpayers earn up to £1,000 in savings interest tax-free, and higher-rate taxpayers £500. This covers interest from banks, building societies, unit trusts – you name it. The good news? Money in ISAs is still completely tax-free. Phew!
Fiscal Drag – The Sneaky Tax Thief
Here's where things get tricky. "Fiscal drag" happens when tax thresholds stay the same, but our incomes go up (thanks, inflation!). This means more and more of us get pushed into higher tax brackets, shrinking our PSA and leading to those unwelcome tax bills. Coventry Building Society reckons a whopping 5.9 million extra people will be affected this year alone, jumping to a staggering 7.7 million by 2027/28. Honestly, who saw that coming?
This year, a further 2.2 million people are being pushed into higher-rate tax, which cuts their PSA in half. Ouch.
Saving Your Savings from the Taxman
So, what can we do? Well, the best way to protect your savings is to max out your ISA allowance (£20,000 a year). This offers tax-free growth – a definite win! If you've already used up your ISA allowance, Premium Bonds are another option. They don't affect your PSA.
But here's a sneaky thing to watch out for: interest earned on fixed-term accounts is "crystallised" at the end of the term. That means it all counts towards your PSA in that tax year. Even small amounts spread across several years can suddenly push you over the limit and bam! A tax bill appears.
Time to Take Action!
With the April 5th tax year-end looming, you need to act now. It’s not that hard though, just a little bit of attention to detail.
- Check your savings accounts: Add up the interest you've earned this year (excluding ISAs).
- Check your PSA: See if you've gone over your allowance.
- Explore tax-efficient options: Use your ISA allowance or think about other tax-advantaged savings.
- Act before April 5th: Make changes to your savings plan before the deadline!
Ignoring This Could Be Costly
HMRC can see your interest. If you don’t report interest that’s over your PSA, you could face hefty tax bills and penalties. Don’t wait for a nasty surprise; get organized and save yourself some serious money!
