Millions of savers across the UK are set to receive an unwelcome letter from HM Revenue & Customs (HMRC) after a significant shift pushed their savings interest into taxable territory.
The Tax Trap for Savers
According to research from Paragon Bank, a staggering 5.2 million non-ISA savings accounts are now earning enough interest to breach the £1,000 Personal Savings Allowance (PSA) for basic-rate taxpayers. Once the interest earned on savings outside of a cash ISA exceeds this threshold, it becomes subject to tax.
Andrew Wright, Paragon Bank's head of savings, issued a stark warning: “With interest rates having recovered from historic lows and the Autumn Budget just around the corner, millions of savers are leaving themselves exposed to unnecessary tax bills.”
Billions at Risk of Taxation
The scale of the issue is immense. Paragon's analysis reveals that a colossal £516 billion is currently sitting in non-ISA accounts that are earning enough interest to exceed the basic-rate PSA limits.
Mr Wright urged savers to take immediate action: “Savers should act now to protect their hard-earned money by moving funds into a tax-free wrapper such as a Cash ISA. Time is running out, and with speculation that ISA thresholds could be cut and the Budget just days away, the window to shield your savings from tax could soon narrow.”
Understanding Your Personal Savings Allowance
The rules surrounding the PSA can be complex. Leading insurer Aviva provides a helpful guide:
- The PSA offers a savings starting rate of £5,000 for those on a low income.
- It uses a standard personal tax allowance of £12,570.
- For higher earners, the allowance shrinks. Where income is over the £100,000 limit, the personal income tax allowance is reduced by £1 for every £2 earned.
- Critically, where income is £125,140 or above, the Personal Savings Allowance is zero, meaning all savings interest is taxable.
With the Labour Party's Autumn Budget on the horizon, the message for UK savers is clear: reviewing where you hold your savings has never been more urgent.
