Savers across the UK, including customers of major institutions like Nationwide Building Society, are being issued a crucial warning about a tax rule that could see them hit with an unexpected bill from HM Revenue and Customs (HMRC).
What is the Personal Savings Allowance?
The warning centres on the Personal Savings Allowance (PSA), a rule that dictates how much interest you can earn from your savings each year before income tax is due. For the majority of workers, this is a critical figure to know. Basic-rate taxpayers, generally those earning between £12,500 and £50,000 a year, can earn up to £1,000 in savings interest completely tax-free.
With top easy-access savings accounts currently offering interest rates around 5%, a saver would need approximately £20,000 in savings to generate that £1,000 threshold. This means anyone with balances exceeding £20,000 needs to be particularly mindful of the rules.
Higher Earners Face a Stricter Limit
The allowance is significantly reduced for those on higher incomes. If you are a higher-rate taxpayer, earning between roughly £50,000 and £125,000, your Personal Savings Allowance is halved to just £500 per year. This lower threshold makes it far easier to breach the limit, especially for those with healthy savings pots.
Financial experts stress that this is an essential consideration for anyone receiving a pay rise, a promotion, or changing jobs to a higher salary. Furthermore, frozen income tax bands mean more households are being pulled into higher tax brackets as their wages increase, inadvertently making their savings more vulnerable to taxation.
Expert Insight from Martin Lewis
Money Saving Expert founder Martin Lewis has frequently highlighted this issue. He explained, "Now if you're a basic rate taxpayer... then your personal savings allowance is £1,000. That means you can earn £1,000 of interest from any legitimate UK sources and you do not have to pay tax on it."
He added a clear rule of thumb: "So if you've got £20,000 or less in savings and you're a basic rate taxpayer, it is very unlikely that your savings interest would be taxed." For higher earners, he cautions that the £500 allowance demands extra vigilance.
Protecting Your Savings from an HMRC Bill
The key takeaway for savers is awareness. Individuals should proactively calculate the approximate interest their savings will generate in a tax year. Those approaching or exceeding their PSA limit may need to consider tax-efficient options like Cash ISAs, where interest is always tax-free.
Ignorance of the rule is not a defence, and HMRC will calculate tax owed based on data provided by banks and building societies. With interest rates remaining elevated compared to recent years, this warning is more pertinent than ever for savers with Nationwide and all other UK banks.
