Britons have been alerted to the risk of being bumped up into a higher tax bracket and losing out on a key tax-free allowance. Savers may be wondering about how interest rates will change given economic uncertainties, but an expert has warned people to check if they could get an extra bill from HMRC.
Jason Hollands, managing director at Evelyn Partners, said: “It is really important not just to focus on the headline interest rates, but to consider the impact of tax. More and more people are going to find they owe tax on cash savings given the frozen nature of the Personal Savings Allowance.”
Savings allowance rules state that basic rate taxpayers can earn up to £1,000 a year in interest without paying tax, while higher-rate taxpayers have a £500 allowance. However, those earning over £125,140 fall into the 45% higher income tax band and receive no tax-free interest allowance.
The Office for Budget Responsibility anticipates 3.2 million individuals will enter higher and additional tax bands by the 2028 to 2029 tax year as thresholds stay fixed. Furthermore, with interest rates still high, Hollands warns that more savers may soon have to pay tax on interest from their savings.
He stated: “With savings rates now at around 4.5 to 5.0%, hundreds of thousands more savers are either paying tax on their cash savings interest, or close to doing so.” He pointed to some options to build up savings without paying tax: “For those not already using their ISA allowances on investments, the £20,000 per adult ISA allowance should be utilised.
“For those with more sizeable sums, another option – if they are married – could be to move cash into whichever spouse might be subject to lower rates of tax.” The Marriage Allowance allows a partner to transfer over £1,260 of an unused income tax personal allowance over to your partner.
Mr Hollands also warned that savings rates can vary and so if you sign up on a particular rate, it could later come down. Given this factor, you may want to consider going for a fixed-rate account.
Rob Morgan, chief investment analyst at Charles Stanley, commented: “The interest rate picture remains positive for savers with the best easy access rates still north of 4.5%. However, this inflation-beating rate of return is likely to narrow over time as the base rate moves lower.
“It may therefore be a good time to consider a fixed rate if you are happy to lock your money away because inflation and interest rate expectations may now fall back a little. A rate of around 4.5% is currently achievable for a one-year fixed term.”
Currently, you can secure fixed rates of 4.7% and above with several accounts offering one- or two-year fixes, according to data from moneyfactscompare.co.uk.