The Bank of England has been increasing the base rate of interest incrementally since December 2021 to curb rising inflation. While the Bank held off raising rates in September, keeping the base rate at 5.25%, there will be many people with savings now earning a decent rate of interest for the first time in the last 14 years.

However, changes to the Personal Savings Allowance are likely to see increases in the amount of interest received on cash accounts, pushing more people into having to complete an annual self-assessment tax form and pay tax on their savings.

For the 2023-24 tax year, the Personal Savings Allowance is £1,000 for basic rate taxpayers, £500 for higher rate and £0 for additional rate payers. Any interest payments over that amount will be taxed at the individual’s marginal rate of tax. The interest which HMRC takes into account includes that from bank and building societies, investment vehicles, government or company bonds, trust funds, life annuity payments and some life insurance contracts, amongst others.

For joint account holders, the interest is split equally between them.

If you have £50,000 on deposit now earning say 5%, which may be earned 1% this time last year, you stand to gain an extra £2,000 interest. Ignoring the personal savings
allowance, you could be liable to an extra £400pa in tax if you remain a basic rate taxpayer or £800 if a higher rate taxpayer. One danger is that you might well have locked up your savings into the next fixed offer but now you will need to think about holding cash in a more accessible way to pay your higher tax bill.

It is now more important than ever to be putting money into tax-efficient savings and investment vehicles. Personal pensions have the advantage of a 25% uplift on payments made into them, through tax relief, for longer-term saving. And UK savers can shelter up to £20,000 each tax year in an ISA, which is tax-free for income and investment growth.

If you'd like to understand how you can best manage your savings, we're here to help. Get in touch here to arrange your free no-obligation appointment. 

Lowes Financial Management is Authorised and Regulated by the Financial Conduct Authority.