Martin Lewis has warned savers that holding more than £10,000 in a bank account could lead to unexpected tax charges. As reported by Birmingham Live, the Money Saving Expert explained how HMRC’s tax rules on savings interest could catch people off guard, particularly those earning higher interest on their accounts.
The concern stems from the Personal Savings Allowance (PSA), which determines how much interest can be earned tax-free. Lewis clarified that savings themselves are not taxed, but the interest earned on them is treated as taxable income.
How the Savings Tax Rules Work
The Personal Savings Allowance sets limits on how much interest can be earned without triggering a tax charge. Lewis explained that:
- Basic-rate (20%) taxpayers can earn £1,000 in savings interest tax-free, which means they can hold up to £20,000 in a savings account at 5% interest without paying tax.
- Higher-rate (40%) taxpayers only get a £500 tax-free allowance, meaning savings beyond £10,000 at 5% interest could incur a tax charge.
- Additional-rate (45%) taxpayers—those earning over £125,000 per year—do not get a Personal Savings Allowance at all, meaning all interest is taxable.
Lewis explained, “At 5% interest, as a basic-rate taxpayer, you can put £20,000 in a savings account and it would be tax-free because that would generate £1,000 of interest.”
However, for higher earners, tax charges can start applying at much lower savings amounts. “As a higher 40% rate taxpayer, you’re allowed £500 of interest tax-free. So it would be £10,000 in there that would save you, and you wouldn’t pay tax if you have it in a top 5% savings account,” he added.
The Hidden Allowance Few People Know About
Lewis also highlighted a little-known tax break, the Starting Savings Allowance, which benefits low earners. He explained that those with total earnings under £12,570 could earn up to £5,000 in savings interest tax-free in addition to their Personal Allowance.
For every £1 earned above £12,570, however, the £5,000 savings interest exemption reduces by the same amount. Using an example, Lewis said, “If you earned £13,570, you’d only get £4,000 for your starting savings allowance.”
How to Avoid Unnecessary Tax on Your Savings
To avoid unexpected tax charges, Lewis advises savers to:
- Check how much interest they are earning and ensure they stay within the tax-free thresholds.
- Consider ISAs, which allow savings to grow tax-free without affecting the Personal Savings Allowance.
- Spread savings across multiple accounts to maximise tax efficiency.
With interest rates at their highest in years, many savers could unknowingly face tax bills for exceeding their allowance. Lewis’ advice is clear: check your savings and plan ahead to keep more of your money.
