Personal savings allowance - watch out!

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In the U.K. you can earn £1,000 of interest without paying tax if you are a standard rate taxpayer. The allowance drops to £500 for those paying the 40% tax rate, and disappears completely for the fat cats paying 45% tax.

If you earn below the tax threshold, you don’t pay tax on interest over the £1,000 personal savings allowance, so long at your income plus the excess interest don’t exceed your personal tax allowance.

In recent years it’s been quite hard for most people to receive more than £1,000 of interest. But with increasing savings interest rates it’s not that hard to exceed it, if you have a reasonable amount of savings. If you put £20,000 in a 6% bond, that’s £1,200 of interest, and you’ll be taxed at 20% on the £200. If you are a 40% tax payer, you’ll be taxed at 40% on £700.

With tax thresholds frozen, more and more people will start to pay tax, and more will move from 20% to 40%.

It’s also worth noting that NS&I changed the way they pay the interest on fixed rate bonds. Until a few years ago they paid the interest every year. Now they pay it all at the end, which means it’s a much bigger lump and therefore much more likely to exceed the allowance.

With low interest rates, ISAs fell from favour and weren’t that useful to most people. But now, with higher savings rates, they are very much back on the agenda. I’ve discovered this week that Nationwide run their cash ISA as a portfolio ISA, which means that you can put some in easy access and some in fixed rate, within the same year. This is something we are now taking advantage of.

Mrs HH and I have been going through our savings in the last couple of days, which prompted me to post this in case anyone finds it helpful. Forgive me if you already know all this, but it’s surprising how some people are totally unaware of this stuff, but a little time and effort can save you quite a bit of money.

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Helpful Nigel thankyou, and well explained.

I have literally in the last few days moved some capital from a slush account into a 2 year fixed rate savings product at 5.5% , considerably more interest than the previous savings account it was in, about 1.6%.

Will keep a close eye on my thresholds etc.

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The freezing of Personal Allowances is going to be tricky going forward as it is very likley that future pensioners on only a state pension could end up paying income tax.

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Unbelievable that there’s people still today who have taken the time to analyse every % and pound for a savings account. If you had £20,000, it should have been in a cash ISA years ago and every subsequent year, if you have the money, add more the next year.

They’re always going to screw you on savings at some point. How deviously they do it, no one knows, but they will. An ISA is the safest way and always has been.

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HH (and others) –

There could be other unwelcome side-effects here, as my spidey-sense has detected some slight but meaningful changes in the way HMRC manage things nowadays (if someone knows better and/or can confirm my thoughts, please do) – I admit I may be a bit behind here:

1- HMRC should be getting automated data feeds on (gross) interest earned by UK tax-payers – but IME they aren’t on 100% of it, so somehow you may feel obligated to tell them, as is your duty (???) – but how?

2- ditto with dividend streams – but IME they aren’t (at least not as yet).

3- the chap I spoke to recently at HMRC acknowledged (more admitted) in his helpfulness, that these bonds, where interest is paid at maturity, are distorting things for people and HMRC (see on as to why).

4- it’s my understanding that HMRC do/will code-you-out on a forward-looking basis for the interest/non-PAYE income (inc DVs) they think you are going to earn. They already do this, but with the levels of interest now being seen, and the timings of payments to people, can heavily distort an annual profile of income.

Bottom line - I can foresee scenarios here where people will be coded-out for interest income they are unlikely to get, with the need to seek refunds etc, obviously on a delayed basis. This could mean that regular PAYE/pension income levels will be overly-depressed, and these things are never simple to unwind IME.

One way around this may to elect for self-assessment, which (I think) becomes mandatory if you have >£10k of ‘additional income’ (non-PAYE) in any event. But, AFAIK, this won’t stop HMRC from forward-coding you based on year-1’s SA return.

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Weird definition of fat cats, they contribute most.

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Worth mentioning (as Martin Lewis has surprisingly only mentioned this once) you can earn up to £5k tax free on interest a year if your income is <=£12,570, which then has a sliding scale down to £1000 up to an income of £17,570.

I’ve no idea yet how you approach the HMRC, but good of HH to remind us as you could end up with a nasty surprise, and may have to sell your Naim kit to fund an HMRC bill :anguished:

Keeping all those interest end-of-year statements will be your friend

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On a slight tangent, the tax-free allowance on dividend income has changed too, which might catch a few people out.

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Thank you for adding that. The starting rate for savings had passed me by. So if someone earns or gets a pension of £10,000, they can still earn £5,000 of interest without being taxed. I’d assumed they could only earn the difference between their earnings and the personal allowance, £2,570, plus the £1,000 personal interest allowance.

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I totally agree. Particularly as recent interest rate levels have been exceptionally low and are forecast to remain where they are possibly for years to come. As you say why give money to the taxman you don’t need to.

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Unfortunately when you take off the tax advantage, for the last few years since around the start of Covid, it was more advantageous not to use a Cash ISA due to the higher rates available for non ISA accounts - that has changed though in the last few months, and certainly worth looking at now. It’s a shame NS&I dont do any tax free saving schemes like they used to.

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Actually they do but only for people who still have the original index linked saving certificates. They allow them to be rolled over on maturity. They did move from RPI to CPI and almost removed the additional interest, but for those of us who still have some it’s been a good couple of years. Premium Bond winnings are also tax free

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Any proceeds from premium bonds are still tax free. I think.

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I think so, but the prizes are so low, hardly worth it IMO

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You are correct.

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The days of some advice being to buy Rolex Daytonas, classic scooters and other useable profit-makers are gone for now, I suppose. So anything useable is going to be a risk as they might continue to lose value.
My usual view on all this is that all the clever money was shifted ages ago into the next thing.

Perhaps just have that slush fund, keep it low enough to not incur taxable interest, then either bung the rest into pension funds or just enjoy it while you’re able to?

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Yes - it was initially £5,000 and then fell to £2,000 and more recently £1,000 and going to drop to £500 next April. One of the reasons for the allowance was to avoid the need for vast numbers of people to prepare tax returns with relatively small amounts of tax to pay, swamping HMRC with work when they are already not keeping up with their workload

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Cash ISAs are so flexible and advantageous that I can’t see any reason not to use them. You’re comparing naff savings accounts with naff savings accounts. No rich person in their right mind would or should use a savings account for anything substantial. If you have enough savings to worry about % and tax implications, you should be getting financial advice, not sticking it in some high street savings account and counting the pennies whilst they use your money like you should.

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Thanks Tim - I hadn’t realised the allowance was due to drop again next year… that seems like a disincentive to invest in business/industry/enterprise (which doesn’t seem like a good idea).

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I think it was initially raised to assist some directors of smallerco’s, who took part of their remuneration via DVs – but it’s now verbally classed as ‘unearned income’. As per my comments above, given the way the tax system is now mapped, I don’t understand how HMRC are going to get the data to address this change, as unless you are registered and reporting via SA, the HMRC is blind to this line(s) of income(?).