Savers with more than £10,000 given alert over possible tax bill

Any savers with more than £10,000 have been given a chilling warning that they could get hit with a tax bill. New statistics from HMRC show that people have 'fallen into' paying higher rates of tax, according to one expert.

People aren't taxed on their savings, but they are taxed on any interest they earn on the savings going over a certain threshold. Adam French, Consumer Expert at Moneyfactscompare.co.uk, said: "The latest statistics from HMRC show how important it is for savers to be aware of their tax liability. Especially many of those who have fallen into paying the higher-rate tax of 40%, whose Personal Savings Allowance (PSA) has been halved from £1,000 to £500 as a result.

"With the Moneyfacts Average Savings Rate currently at 3.53% AER, higher rate taxpayers with more than around £14,500 saved could expect to earn more than £500 in interest this tax year and could therefore find themselves footing an unexpected tax bill.

"However, plenty of savers can avoid this tax bill by making use of their yearly ISA allowances, with cash ISAs keeping the savings of millions of people free from tax. They shouldn't expect a raw deal either with some of the top paying easy access cash ISAs paying as much as 5% AER interest once introductory bonuses are taken into account, for example."

Financial expert Martin Lewis has previously explained on his BBC Podcast that some savers could be hit over the interest on as little as £10,000 savings: "You do not pay tax on your savings. You pay tax on the interest earned on savings. And I know it is a fine difference but it is an important one.

"You put money in the bank or building society or wherever you do in a deposit savings account and you do not pay any tax on the money you put in, you only pay tax on the money you've earned. This is because it is treated like any other form of income although it does have special allowances and it's really important to actually focus on what those special allowances are."

Mr Lewis broke down the tax-free savings for the public, emphasising that the key figure to remember is £12,570. He explained: "The first thing to say is everybody has £12,570 that they can earn from any source, whether earned income or savings interest, or anything else which you don't pay tax on - your normal standard tax-free personal allowance.

"In savings specifically you then have, if you're a basic 20 per cent rate taxpayer, £1,000 a year of interest you can earn from any savings source which you don't pay tax on. That's £1,000 of interest, not £1,000 in a savings account.

"What it means is that in a good savings account people need to be wary of how much money is in there - with normal rate taxpayers being fine with £20,000 in savings. So at 5 per cent 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."

Martin then highlighted the rules on tax relief that many higher earners may not be fully aware of. He said: "As a higher 40 per cent 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 interest if you have in the top 5 per cent savings account. If you happen to be lucky enough to be a top 45 per cent rate taxpayer earning over £125,000 you don't get one of these." If someone has more than £10,000 and be a mid-rate taxpayer then interest tax would have to be paid.

Additionally, Mr Lewis has brought attention to a little-known tax allowance for those on lower incomes or living solely off their savings interest. He said: "There is another savings allowance that is rarely spoken about.

"This is called the starting savings allowance. Now this is for low earners and it's quite complicated."

He added: "So what it says is you can earn up to £5,000 on top of your £1,000 as a basic rate taxpayer of interest tax-free as a low earner. If you have earned income under £12,570, which is the standard tax allowance, you can earn £5,000 on top of that in savings in this starting savings allowance in savings interest, which is untaxed.

"For every pound you earn above £12,570 you lose a pound of the £5,000. If you earned £13,570 you'd only get £4,000 for your starting savings allowance."

He continued: "For people where all of their money was generated by savings interest they would have £12,570, their normal tax free allowance, they would have their £5,000 starting savings allowance and they would have their £1,000 savings allowance ads a basic rate taxpayer which means you can earn £18,570 tax free if all your money came from savings interest.

"And then you could have an ISA on top for £20,000 a year, which would be tax-free, and you could put money into Premium Bonds, £50,000 of which would be tax-free." Mr Lewis has also addressed the widespread misunderstanding about 'double taxation' on savings, saying: "Let's be technical, it's not.

"There are other things that are double taxation but you get taxed on the amount of money you earn on your income, and then you get taxed on the amount of money you earn on your savings. You do not get taxed on your savings."