Money Saving Expert founder Martin Lewis has issued a stark warning to savers about the potential tax implications due to burgeoning interest rates.
On an episode of ITV’s The Martin Lewis Money Show Live, Martin highlighted that the landscape for taxation on savings income has “really changed very much” over recent years, with interest rates climbing from about 1 percent to around 5 per cent.
He cautioned that with the rise in interest rates, more individuals might hit their Personal Savings Allowance limit the threshold beyond which you have to pay tax on interest earned from your savings.
Martin underscored the severity of the situation reminding viewers that even basic rate taxpayers could be facing tax on their savings sooner than expected. For instance, someone paying basic tax with a savings pot of £20,000 could be liable for tax within a year.
He pointed out that a higher rate taxpayer, anyone earning £50,270 annually, could start owing tax with just £10,000 saved up, reports the Express.
Martin stressed: “So look, savings tax is back for many. When you get interest on your savings, it is eligible for income tax. It counts as income.”
For clarity on the allowances, he explained: “But you get a Personal Savings Allowance. What this means is a basic rate taxpayer can earn £1,000 a year of interest and you don’t pay tax on it. It can be in any form of savings account that you like.”
However, for those at the higher echelons of income, Martin delineated the differences, “As a higher 40 percent taxpayer, you can earn £500, as a top 45 percent taxpayer if you earn over £125,000 a year you don’t get one of these.”
“So what does that mean in practice? So if you take that top 5 percent figure, as a basic rate taxpayer if you have over £20,000 in savings at 5 percent, you would earn more than a grand of interest so everything above that would be taxed.”
“As a higher rate taxpayer it’s £10,000.”
“So for those people saving £100, £1,000, £2,000, it’s irrelevant to you if you’re a basic rate or higher rate taxpayer.”
“For those people who’ve got savings that get into the tens of thousands of pounds, tax starts to become more important.”
“And the reason it’s come back is, when interest rates are 1 percent, to earn £1,000 of interest you needed a hell of a lot in savings. Now they’re 5 percent, you need a fifth of it, so it really has changed very much.”