A record 2.1 million people are expected to pay tax on their savings interest this year due to rising interest rates and a stagnant personal savings allowance. With average savings account rates reaching 5%, more savers are hitting their tax-free limit. This marks a significant increase from previous years, with 945,000 basic rate taxpayers now affected, up from 505,000 in 2022-23.
The personal savings allowance, which has not changed since 2016, provides a £1,000 tax-free threshold for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers receive no allowance.
Interest earned is shared with HMRC by banks, so savers may face unexpected tax bills, especially those with fixed-rate accounts that pay interest at the end of a term, pushing all the interest into one tax year. We recommend options such as spreading interest payments across years or using ISAs to reduce tax exposure.
Joint account holders should also consider shifting savings to lower-earning partners to maximize tax allowances.
If you have questions, Jermyn & Co is here to help you.