Savings tax '£10,000' alert as expert says millions 'face shock nest egg bill'

Experts today issued a warning over the frozen Personal Savings Allowance (PSA) thresholds which they claimed will see millions paying extra tax. Data from the CACI Business Consultancy has been analysed by Shawbrook, suggested six million savings accounts (6,085,327) may unwittingly tip over the threshold of the Personal Savings Allowance (PSA) and face an unexpected tax bill.

The experts said this was a result of savers seeking to maximise the interest they can earn on their cash, whilst taking advantage of a sustained period of relatively high interest rates during a period in which the PSA has remained frozen.

There are two key savings thresholds - basic rate taxpayers can earn £1,000 in savings interest without paying tax and higher rate (earning over £50,000) can get £500 before paying the taxman. The thresholds have been frozen since 2021.

Sally Conway, savings expert at Shawbrook said: “Without careful consideration savers could face a shock tax bill on their nest eggs. There are currently over five million more savings accounts at risk of tax than there were just over three years ago. This outlines just how much the frozen threshold has impacted savers who aren’t making use of ISAs.

“With savers still taking advantage of competitive interest rates, many savers could be sleepwalking into a tax bill on their interest. This is particularly relevant for higher-rate taxpayers, who only get £500 tax-free, and additional-rate taxpayers, who get none. For example, a higher-rate taxpayer with £12,000 in a non-ISA account earning 4.30% could exceed their tax-free allowance.

"To avoid this and make the most of higher rates while they last, savers should consider ISAs, which allow up to £20,000 tax-free savings per person. Making use of ISAs can be a great way to boost savings in a tax-efficient manner. Additionally, exploring options beyond major banks might lead to better interest rates, often specialist savings banks can be savers’ best-kept secret.”

The Personal Savings Allowance (PSA) thresholds, introduced in 2016, were designed to let savers earn a limited amount of interest tax-free. However, with rising interest rates, an increasing number of savers are now exceeding their respective thresholds. In October 2021 just 147,000 savings accounts were at risk of tax, the increase shows the impact of frozen thresholds, potentially pulling some 5.8m more accounts into paying tax.

Personal finance expert has spoken about the thresholds before and warned people about the risk of accidentally paying tax on the interest. On his BBC Podcast the Money Saving Expert founder explained that there were two thresholds - of £10,000 and £20,000 that people needed to be aware of depending on how much they earn.

And he said there were ways of lessening the tax people might pay by using the right kinds of accounts. Mr Lewis said that one key figure was £12,570 because this is the personal tax threshold for everyone: “The first thing to say is everybody has £12,570 that they can earn from any source, whether earned income or savings interest, or anything else which you don’t pay tax on - your normal standard tax-free personal allowance.

“In savings specifically you then have, if you’re a basic 20 per cent rate taxpayer, £1,000 a year of interest you can earn from any savings source which you don’t pay tax on. That’s £1,000 of interest, not £1,000 in a savings account.”

What it means is that in a good savings account people need to be wary of how much money is in there - with normal rate taxpayers being fine with £20,000 in savings: “So at 5 per cent interest as a basic rate taxpayer you can put £20,000 in a savings account and it would be tax free because that would generate £1,000 of interest. “As a higher 40 per cent rate taxpayer, you’re allowed £500 of interest tax-free.

"So it would be £10,000 in there that would save you and you wouldn’t pay interest if you have in the top 5% savings account. If you happen to be lucky enough to be a top 45 per cent rate taxpayer earning over £125,000 you don’t get one of these,” Mr Lewis explained

For low earners - or people entirely living off interest from savings there is another tax allowance. Mr Lewis explained: “There is another savings allowance that is rarely spoken about. This is called the starting savings allowance. Now this is for low earners and it’s quite complicated.

“So what it says is you can earn up to £5,000 on top of your £1,000 as a basic rate taxpayer of interest tax free as a low earner. If you have earned income under £12,570 which is the standard tax allowance you can earn £5,000 on top of that in savings in this starting savings allowance in savings interest which is untaxed. For every pound you earn above £12.570 you lose a pound of the £5,000. “

Mr Lewis explained it through an example of if you earned £13,570 you’d only get £4,000 for your starting savings allowance. He added: “For people where all of their money was generated by savings interest they would have £12,570, their normal tax free allowance, they would have their £5,000 starting savings allowance and they would have their £1,000 savings allowance ads a basic rate taxpayer which means you can earn £18,570 tax free if all your money came from savings interest. And then you could have an ISA on top for £20,000 a year which would be tax free and you could put money into Premium Bonds, £50,000 of which would be tax free.”