Millions could face "unnecessary" tax bills; learn how to protect your savings

Due to their savings interest exceeding the personal savings allowance, millions of Britons may be subject to taxes this year

Are you in danger?

Because billions of pounds are kept in savings accounts that do not provide adequate protection from the taxman, millions of savers in the UK could receive an "unnecessary" tax bill this year.

According to new data from Paragon Bank, basic rate taxpayers in the UK who earn between 12,571 and 50,270 have 516 billion in non-ISA savings accounts with balances big enough to exceed the personal savings allowance.

Some taxpayers are exempt from paying income tax on savings interest thanks to the personal savings allowance. Basic rate taxpayers can earn up to £1,000 in savings interest annually, while higher rate taxpayers are only allowed £500.

However, the data indicates that 5.2 million UK savings accounts held by basic rate taxpayers will earn more than the 1,000 allowance in interest this year, resulting in a 20 percent tax bill on the savings interest over the threshold.

For taxpayers with higher rates, the issue gets even worse.

The personal savings allowance for higher rate taxpayers (those making between £50,271 and £125,140) is cut in half, leaving them with only £500 in tax-free savings interest outside of an ISA.

According to Paragon's research, nine million UK non-ISA savings accounts owned by higher rate taxpayers, valued at over 632.7 billion, will earn more than 500 in interest this year. This means that these savers should get ready for an additional tax bill.

Since additional rate taxpayers, who pay the highest income tax rate, do not receive any personal savings allowance, any interest they earn outside of an ISA is taxable.

The government's coffers have been bolstered by British citizens who earn interest above the personal savings allowance. Income tax on savings interest is expected to reach 6 billion this year, up from 2 billion in the 2022 - 2023 tax year, according to HMRC.

This tax year, additional rate taxpayers are anticipated to contribute the most (4.2 billion), followed by higher rate taxpayers (1.3 billion) and basic rate taxpayers (500 million).

Paragon Bank's head of savings, Andrew Wright, stated: "Millions of savers are exposing themselves to needless tax bills because interest rates have recovered from historic lows and the Autumn Budget is quickly approaching."

"Savers should take immediate action to safeguard their hard-earned money by transferring funds into a tax-free wrapper like a cash ISA. The "

Wright also cautioned savers that there might not be much time left to transfer large amounts of money into the tax wrapper because there are rumors that the Autumn Budget on November 26 will lower the cash ISA thresholds.

Using an ISA to protect your money.

Using an ISA is the simplest way for UK savers to protect their savings interest from the tax man.

ISAs allow you to contribute up to £20,000 per tax year. ISAs come in a variety of forms, such as cash ISAs and stocks and shares ISAs. The allure of an ISA is that it protects investment income and interest from taxes.

For instance, let's say you are a basic rate taxpayer who has saved the maximum amount in a cash ISA for five years, resulting in an ISA holding of £100,000.

You could anticipate earning 4.56 percent interest over the next 12 months if you invested the full amount in Trading 212, the best cash ISA currently available.

This £100,000 would increase by 4,560 at the end of the year if the interest rate remained unchanged. You wouldn't have to pay taxes on this money because it was kept in an ISA.

However, the 4,560 earned would exceed the 1,000 personal savings allowance if this £100,000 was kept and grown in a non-ISA savings account. As a result, 3,560 of the interest earned would be taxable. As a result, you would pay the government 712 in taxes.

In a different guide, we examine additional strategies to protect your savings from taxes if you've used up your annual allowance.