You might be paying more tax than you need to. Here’s what you could do about it.
Many of us enjoyed higher returns on our savings throughout 2022 and into 2023, but many savers could be paying more tax as a result. We look at potential solutions.
This article gives you information to help you make the most of your money, but it isn’t personal advice. If you’re not sure if a certain action is right for you, please ask for advice.
Last Updated: 12 September 2023
Important information - Information is correct as at 7 August 2023 and is based on the rates and allowances for individual savers which apply to the 2023/24 tax year. The personal savings allowance is calculated using rest of UK income tax bands, including for Scottish taxpayers. Tax rules can change, and benefits depend on your circumstances. The tax year runs from 6 April to 5 April.
Should you require specialist tax advice please ask for assistance from an accountant. We provide you with information to help you make informed decisions, but not personal advice. Fixed term products generally only allow access to your cash at maturity. Inflation reduces the future spending power of money.
2022 saw a sharp spike in interest rates.
At the start of the year, the average one year fixed rates were around 0.36%. By autumn of the same year, they were more than six times higher.
The opportunity for better returns didn’t go unnoticed. Billions were poured in to fixed term products, and a large portion of those fixed terms will be maturing in the autumn of 2023.
Those saving for a family holiday, helping their children with wedding expenses, or supporting a family member through higher education, would have found their returns boosted significantly.
But higher returns are just one side of the coin. And those same savers could be closer to exceeding their Personal Savings Allowance.
This article isn’t personal advice. If you’re not sure if something is right for you, seek advice.
What is the Personal Savings Allowance (PSA)?
The PSA lets non, basic and higher-rate taxpayers earn some interest each tax year before they pay any tax on it. Your individual allowance will depend on which income tax band you fall into.
The PSA for basic rate taxpayers is £1,000. This drops to £500 for higher-rate taxpayers and additional rate taxpayers don’t get a PSA at all.
The personal savings allowance is calculated using rest of UK income tax bands, including for Scottish taxpayers.
Millions of us could be paying more tax
At the start of 2022, a higher-rate taxpayer would have needed to put about £36,000 in a top one year fixed rate product to breach their allowance of £500. In Autumn 2022, that figure was around £14,250.
And now the best one year fixed terms have passed 6%, higher-rate tax payers can only save around £8,300 before breaching their allowance.
People saving for loved ones will now have a lot less to work with if they don’t want to exceed their PSA.
It also doesn’t help that a freeze on income tax bands (announced last year), and increasing wages, will push millions of people into the higher-rate tax band over the years from March 2021 to 2028.
That would mean over that period, that millions of the new higher-rate taxpayers could see their PSA halved. Those pulled into the additional rate tax band would see their PSA axed completely.
Saving tax free
Unlike other savings accounts, all interest earned within a Cash ISA is free from UK income tax.
Summer 2023 saw the average variable rate Cash ISA at its highest since 2011. So those saving for the people that matter can make sure their cash is working hard – tax free.
You can put in up to £20,000 in the 2023/24 tax year across all your ISAs. But remember, you can only put money into one of each type of ISA per tax year.
The HL Cash ISA offers rates from our banking partner. The online service allows you to top up, earn tax-free interest, and withdraw, all in a few clicks in one online account. Plus, if you hold any other HL products, you can access your HL Cash ISA through the same login. Please be aware that inflation reduces the spending power of money.
An easier way to manage your savings tax
If you’ve reached your ISA allowance for the year, and you’re going to pay tax on your savings, a savings platform could make your life easier.
Active Savings gives you access to consistently competitive rates from our bank and building society partners, in one online account.
Plus, you can download a single consolidated tax certificate for all your savings.
See your savings in one place, mix and match a huge variety of terms, and stay on top of your tax. All without the hassle.
This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248.
The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money. Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).