The idea that saving is good is drummed into us from a young age. Going to the bank rather than the sweetshop with pocket money is the foundation for financial security.
However, the taxman is also interested in our savings, as he wants a portion of it.
Ways to save
Unlike your childhood piggybank, saving with a bank or building society account could mean earning interest. Interest is paid monthly, quarterly or annually, as a reward from the account provider for lending them your money.
There are several types of accounts.
- Easy (or instant) Access Savings Accounts: These allow you to withdraw your money at any time, but they usually offer lower interest rates compared to other types of accounts.
- Fixed Rate Savings Accounts: With these, you agree to lock away your money for a set period (often 1-5 years) in exchange for a higher interest rate. Accessing your funds before the term ends may result in penalties
- Notice Savings Accounts: These accounts require you to give a certain number of days' notice before making a withdrawal. They often offer higher interest rates than easy access accounts.
- Regular Savings Accounts: These are for regular deposits (usually monthly) over a fixed period, often offering attractive interest rates. Withdrawals may be limited or restricted.
- Children's Savings Accounts: These accounts are for children under 18 and often come with attractive interest rates. In some cases, withdrawal restrictions may apply, such as parental control, withdrawal limits and notice periods
The common issue they all face is that they are all monitored by the taxman, who will take a share of the interest your money earns.
How tax on personal savings works
You could be liable for Income tax on interest you earn on your savings. But there are some allowances that limit the amount the taxman can take.
First, there is your personal allowance. If you had no other income and earned savings interest below the ยฃ12,570 threshold, there would be no tax to pay. If your total income (including savings interest) is below ยฃ17,570, you can benefit from the starting rate for savings. This means you can earn up to ยฃ5,000 in savings interest without paying tax. Itโs important for you to note that the starting rate for savings is a maximum of ยฃ5,000, however, this is reduced by ยฃ1 for every ยฃ1 of income above your Personal Allowance.
Then thereโs your personal savings allowance (PSA). The PSA lets savers earn a set amount from savings before having to pay tax on the income. It is worth ยฃ1,000 for basic rate taxpayers but drops to ยฃ500 for those on the higher rate and disappears altogether for those on the additional rate.
If you are a basic rate taxpayer, 20% of the interest you earn after the first ยฃ1000 will go to the taxman, and if you are a higher rate taxpayer, its 40% after the first ยฃ500. There is no savings allowance for additional rate taxpayers.
Tax on savings may not have seemed important when interest rates were low a few years ago, as returns were small. But with many savings accounts now at around 5%, even a modest ยฃ10,000 emergency fund can quite easily breach the ยฃ500 PSA allowance for high earners.
So how can you protect your savings?
Discovering that the taxman is enjoying your interest almost as much as you do might make saving feel much less worthwhile.
But (at least for the moment) there is a simple way to help you protect your savings from the taxmanโs attention.
A Cash ISA can give you the full rate of interest on your savings, because (under current legislation at least) there is no income tax to pay on interest gained from them. Itโs a tax efficient way of saving. It means that even an ISA with what appears to be a lower rate could actually be more rewarding than a conventional savings account.
You can even select an ISA that accepts monthly payments, or that allows easy access.
There are fears that the government may change the concessions on Cash ISAs. No-one knows what the future holds, but if youโre looking for a way to reduce the impact of tax on your savings, an ISA might be the most appropriate way to do it.
There are plenty of ISAs to choose from. To get the help you need to find one thatโs suitable for you, call us at Continuum. Remember, you have an ISA allowance that allows you to put ยฃ20,000 in an ISA each tax year, and the 2024/25 tax year is running out fast.
Thatโs why,ย to help mitigate the taxation on your savings, you need to call us today. To help mitigate the taxation on your savings
https://www.telegraph.co.uk/money/tax/how-tax-personal-savings-works
Best savings accounts: 5.25% easy access or 4.63% fixed rates
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice, or a recommendation to a particular saving strategy you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate deposit accountsย and taxation advice.
Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change.
