People with £7,500 in their savings accounts have been warned about an unexpected HMRC tax. A personal finance expert has revealed key errors and hazards in the savings account procedure as the Cost of Living Crisis continues.
Hidden Tax Traps in Fixed-Rate Accounts Could Catch Savers Off Guard
Laura Suter, director of personal finance at AJ Bell, pointed out that although many people use ISAs to shield their money from taxes or arrange their savings to reduce their tax bill, there are still some hidden tax traps that can catch savers off guard without them even noticing, according to BirminghamLive.
She went on to explain, “For example, the personal savings allowance protects lots of people from paying tax on their savings, as it means basic-rate taxpayers can earn £1,000 in savings income before they pay tax on it, while higher-rate taxpayers have a £500 allowance," she said. "But lots of people will breach this limit this year – maybe without knowing.”
Ms Suter identified five less commonly recognised "traps" that savers should be wary oftake into account. Regarding fixed-rate accounts, she stated: “Lots of people are picking fixed-rate savings accounts at the moment, locking their money up for one, two, three or even five years to get a guaranteed interest rate.
"But you are taxed on the interest on your savings when it is accessible by you, so if you pick a fixed-rate savings account that pays out all the interest at maturity, for tax purposes all of that interest will be counted in one tax year. This means that the interest from just one account could take you over your Personal Savings Allowance on its own."
How to Avoid Exceeding Your Personal Savings Allowance with Fixed-Rate Accounts
If you have £7,500 in a top three-year fixed-rate savings account currently offering 4.51% interest, you would earn £1,061 in interest by the time it matures, assuming the interest compounds annually. This amount would push a basic-rate taxpayer over their Personal Savings Allowance for that year.
Ms. Suter advised that to avoid this issue, you could choose an account where the interest is paid out monthly or annually, spreading the earnings across different tax years. Alternatively, she suggested considering a fixed-term ISA savings account, where the interest earned is tax-free.