The UK tax authority, HMRC, has warned that individuals with bank balances of £11,600 or more might need to pay tax on the interest their savings generate.
Alice Haine, a personal finance analyst at Bestinvest by Evelyn Partners, explained:
“The point at which your savings become taxable depends on the interest rate of your account—and sometimes on whether the interest is calculated monthly or annually. For savers with higher interest rates, this could mean paying tax on their interest even if their savings are lower than they expect. Unfortunately, many people don’t even realise they could owe tax on their savings.”
She went on to say:
“For higher-rate taxpayers, savings of around £11,600 in an account offering a 4.31% interest rate would mean you’ve already used up your £500 personal savings allowance. After that, tax would start being applied to the interest you earn. Basic-rate taxpayers, on the other hand, can save up to £23,200 in the same type of account before using up their £1,000 allowance and being taxed on their interest.”
Alice also highlighted how to make the most of tax-free allowances:
“The £20,000 annual ISA allowance covers all types of ISAs. A smart saver might deposit part of their funds into a high-interest cash ISA while investing the rest in stocks and shares ISAs to take advantage of long-term growth opportunities.”
She added:
“For individuals earning slightly over the £50,270 higher tax threshold, where the 40% tax rate applies, using salary sacrifice could bring your income below this threshold. This not only reduces the tax you pay but also increases your pension contributions and effectively doubles your personal savings allowance.”
However, Alice advised caution:
“While salary sacrifice can help secure your financial future by boosting your pension, it might impact your ability to get credit, like mortgages, since it lowers your take-home pay.
“It’s also important to consider how this could affect other employee benefits such as life insurance, holiday pay, sick pay, and maternity pay. Always ask your employer for a personalised breakdown of how salary sacrifice might affect your pay and benefits before making a decision.”
