Savers urged to ‘watch out’ as interest rate rises may result in paying more tax

Savers are being urged to “watch out” as rising interest rates over the past year are pulling households into higher tax brackets.

The Bank of England has raised the base rate numerous times in a bid to rein inflation but excerpts are warning bank customers are unprepared for the tax liabilities the interest on their savings will shortly incur.

While savers have benefited from hiked interest rates, the central banks’s decision means more people are saving more than the personal allowance.

Currently, the personal allowance threshold is £12,750 and this is the amount people interest tax-free if they have not used it up on their wages, pension or other income.

The majority of savers do not pay tax on their savings but rising interest rates have pushed people above this threshold.

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How much tax will you pay?

When someone’s taxable savings income falls within the basic rate band, and after the deduction of the income tax personal allowance if applicable, they will normally pay income tax at the rate of 20 percent.

The basic rate band for the 2023/24 tax year is £37,700 which means this rate will be paid up to £50,270.

After this amount, a higher tax rate of 40 percent and the additional rate of tax is applied to savings above £125,140.

It should be noted that taxpayers in Scotland have different rates and bands of tax to the rest of the UK.

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Rob Morgan, a chief investment analyst at wealth manager Charles Stanley, broke down why savers need to be careful when it comes to exceeding these tax bands.

He explained: “Individuals need to watch out as it is not just interest on savings that counts towards the personal savings allowance, and, If applicable, the starting rate of savings.

“Income from certain investments do too including unit trusts and open-ended investment companies where income is classed as interest rather than dividends, government bonds (gilts), corporate bonds, purchased life annuities and some life insurance contracts.

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“Add these to the equation and many other unwitting investors are going to be potentially exceeding the modest savings allowance.”

The financial analyst noted that savings and interest-bearing investments in tax-free accounts do not count towards the personal allowance.

These include Individual Savings Accounts (ISAs) and certain National Savings and Investments (NS&I) accounts.

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