MILLIONS of households face being hit with tax bills for the first time as savings rates soar.
Basic-rate taxpayers get a £1,000 savings allowance each year, which is the amount you can earn in interest before you pay any tax.
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For higher-rate taxpayers, the allowance is £500 a year instead.
Interest rates have been at rock bottom in recent years, meaning you’d have to have an awful lot of money stashed away to max out this allowance.
In December, the Bank of England hiked interest rates by 50 basis points from 3% to 3.5% – a ninth consecutive rise.
A rate rise is generally good news for savers, as some banks have been bumping up interest rates on savings accounts.
Average savings rates are at their highest levels in over a decade, according to MoneyFacts.
The average easy access rate rose to 1.43% and stands at its highest point in over 13 years.
While the average one-year fixed ISA stands at 3.30% – its highest point since January 2009
On the other hand, people with larger lump sums, or those on higher incomes, may find themselves busting their personal savings allowance for the first time since it was introduced in 2016.
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Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, described it as a “sting in the tail”.
She told The Sun: “Although the rates on some of the most competitive fixed rate accounts have dropped back slightly, you can still get a competitive rate over five years of 4.6%, so a basic rate taxpayer with £21,300 would bust their personal savings allowance of £1,000.
“For higher rate taxpayers, who have an allowance of £5,000, they’d earn more than this with a lump sum of £10,700.”
The tax on your savings will depend on how much interest you make, but also on your overall tax position, Sarah said.
Some people can make far more in interest before paying tax, so it’s worth understanding the rules.
If you earn less than the personal allowance of £12,570, you can use the rest of it to cover savings interest.
So someone earning £11,000 would start by using £1,570 of their personal allowance.
If you’re on a low income, you also get the so-called starting savings rate.
You can get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings.
If you earn under £12,570, you also get an allowance of £5,000.
So that person earning £11,000 could make £6,570 in interest before paying any tax on their savings.
If you earn between £12,570 and £17,570, you’ll get a chunk of the starting savings rate.
This shrinks by £1 for every £1 you earn over the personal allowance threshold.
At that stage, because you become a basic rate taxpayer, you’ll also get the personal savings allowance of £1,000.
So someone earning £13,570 would get £4,000 at the starting savings rate and £1,000 of personal savings allowance.
This could make £5,000 in interest before paying tax.
If you earn between £17,570 and £50,270, you’ll just get the personal savings allowance of £1,000.
How can I protect my savings?
Sarah noted it pays to do some research before deciding where to put your cash.
She said: “You can protect your savings from tax within a cash ISA.
“However, at the moment rates on cash ISAs tend to be lower than on their equivalent savings accounts.
“So you’ll need to plug your rate and lump sum into an online savings calculator to work out where you’d be better off.”
Research websites like MoneyFacts.co.uk and price comparison websites such as Compare the Market, Go Compare and MoneySupermarket will help save you time and show you the best rates available.
These sites let you tailor your searches to an account type that suits you.
As a rough rule of thumb, Sarah said a basic rate taxpayer with £20,000 in savings would make more overall in a savings account.
A higher-rate taxpayer with the same sum would make more in the cash ISA – once the tax is taken into account.
Here, we list the best savings accounts deals to stop soaring interest rates eating away at your cash.
Meanwhile, we reveal all the bank branches closing in 2023 – including Barclays, HSBC, Lloyds and NatWest.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected]
