Don’t Fall Foul of the Taxman
In April 2016 banks and building societies had to start paying any interest free from tax (gross), it then became the savers responsibility to inform the revenue should you go over your allowances.
Lets point out that ISAs are paid tax free so you there is no need to report these to the revenue. Any savings accounts you hold that are not ISA wrapped will therefore earn some form of interest.
With the recent interest rate rises lots of people are now in danger of falling foul of not realising they may have to complete a tax return and potentially pay tax.
First off there are different allowances based on your current income tax position:
|£0 – £12,750 Nil Rate Tax Payer||You can earn £5000 tax-free|
|£12,751 – £17,570 Basic and Low Income Tax Payers||You can earn £5000 tax-free Can also earn up to £1,000 of further interest on their savings without having to pay tax with the Personal Savings Allowance.|
|£17,571 – £37,700 Basic Rate Tax Payer||Can earn £1,000 interest on their savings without having to pay tax with the Personal Savings Allowance.|
|£37,701 – £125,140 Higher Rate Tax Payer||Can earn up to £500 worth of interest tax-free with the Personal Savings Allowance.|
|£125,141 + Additional Rate Taxpayer||No savings interest allowance|
Due to the recent interest rate rises you could now pay tax where you wouldn’t have ordinarily.
£50,000 @ 0.10% = £50
£50,000 @ 3.88%* = £1940
As you can see there is a clear difference in return over the months as rates have been rising, not only have the risen, there is the expectation that rates could rise again shortly. This now means if you are a basic rate tax payer you will need to submit a tax return of pay tax on the amount over your allowance e.g. £1940 – £1000 allowance = £940. As a basic rate tax payer you’ll need to pay 20% on the £940 = £188. Remember if you are a higher rate tax payer you’ll need to pay 40% and this figure rises £576 in tax and as a higher rate tax payer this increases to £873.
*Rate checked online 07/06/2023 Principality building society instant access 2 withdrawals permitted.
If you go over your allowances and are either employed or retired HMRC will alter your tax code.
You might be thinking why should I bother to let the taxman know about the extra interest, quite simply HMRC use very sophisticated software that can detect changes to patterns over time, there are some very harsh penalties should you fall foul, starting with a £5,000 fine or 6 months in jail. Even worse the maximum penalty can be 7 years jail sentence and an unlimited fine.
If you feel this could be you and want to discuss the options you have to pay less in tax making use of the above allowance plus others to help eliminate the above concern you can book a time with an independent financial adviser to discuss your own personal circumstances on 01483 654135 or firstname.lastname@example.org.