Do you pay tax on your savings?
It can be hard to build up savings these days. Money is tight for many of us and putting spare cash away is difficult.
It is harder still if the taxman helps himself to a share of the interest your money earns.
You need to be certain that you keep the taxman at bay and fortunately when it comes to savings there are perfectly legal ways to do this.
How much could the taxman take?
The taxman will treat the interest you earn on savings as if it were income. This would mean that if you pay income tax at a standard rate of 20% (which you will if you earn £12,571 to £50,270 in the current tax year) a fifth of what your savings earn would go to the taxman.
If you had a standard savings account with a bank or building society you would not even know that this was happening, because the tax would be deducted by the provider before you had even seen it.
If you earn more than £50,270, you could be required to pay 40% on interest, and the extra 20% would be deducted by the taxman through your PAYE tax code – or he might demand it as payment at the end of the year.
But things may not be as bad as that – because you can use your Personal Savings Allowance.
What is a Personal Savings Allowance?
The Personal Savings Allowance or PSA was introduced in April 2016 to make savings more worthwhile. It lets basic-rate taxpayers earn up to £1,000 in savings income tax-free. Higher rate taxpayers can earn up to £500.
Current returns on savings accounts are so low, less than 5% of people in the UK pay tax on their savings interest thanks to the PSA. In fact, at current dire savings rates as a basic-rate taxpayer, you can have £50,000 in a top-paying 2% one-year bond, or any other high-interest savings account offering the same level of returns and staying within the £1,000 limit.
The PSA covers any interest you earn from savings. Bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts. It also includes interest earned on other currencies (such as US dollars or euros) held in UK based savings accounts.
Interest earned on Peer-to-Peer lending – the kind we make possible at Fund Ourselves - is also covered.
So as long as you are a small saver, you won’t have to worry about paying tax. For most people the PSA will mean all of their savings are tax-free and therefore when choosing a home for your savings, the basic question is simply "Which one pays the highest rate?" (You might like to look at the returns we offer).
Are you a big saver?
Your bank or building society will pay all savings interest due to your gross (without tax taken off the amount).
You’ll get a lower personal allowance for income tax to pay the tax due on savings interest. But be careful - HMRC will look at how much you got in saving interest last year and base your tax code next year on that if you went over your Personal Savings Allowance.
If you’ve had a tax code change in the past and are now earning less interest than your PSA, you’ll need to contact HMRC as it will need to adjust your 2021/22 tax code to be correct.
You can call them on 0300 200 3300 for help or go online to your personal tax account – go to ‘check your income tax’ and then ‘tell us about a change’. They’ll issue a new tax code.
But you can still avoid paying tax
But what happens if you have a large cash lump sum – such as inheritance?
It could still be possible to cut the tax you pay by using an ISA. An ISA is an Individual Savings Account, and it lets you invest £20,000 a year (in the current tax year) under your ISA allowance. A Cash ISA puts a tax-free wrapper around your savings, so you pay no tax on the interest earned – however much it might be!
While we strongly advise you not to accept this as financial advice, we hope that it will at the very least offer you an opportunity to gain a new perspective and challenge your current financial situation. This article is not in any way related to any of the Fund Ourselves products.