HMRC warning as thousands to be dragged into ‘no tax-free amount’ | Personal Finance | Finance

Taxpayers have been warned they could be dragged into a higher rate of tax and lose out entirely on an important allowance.

With speculation on-going about the state of the economy and what it could mean for interest rates, a savings expert has urged people to consider how their tax band factors into the performance of their savings.

Jason Hollands, managing director at Evelyn Partners, said: “It is really important not just to focus on the headline interest rates, but to consider the impact of tax.

“More and more people are going to find they owe tax on cash savings given the frozen nature of the Personal Savings Allowance.”

Those who pay the basic rate of income tax can earn £1,000 a year of interest tax-free while those on the higher rate can accrue £500 in interest.

But once you hit the 45% higher income tax band, earning £125,140 or above, you don’t get any tax-free interest allowance on your savings.

The Office for Budget Responsibility estimates that 3.2 million people will move into higher and additional rate tax bands by the 2028 to 2029 tax year, with income tax bands frozen at their current levels until then.

Mr Hollands also warned that current high interest rates means many savers may be close than they think to paying tax on their savings.

He said: “With savings rates now at around 4.5 to 5.0%, hundreds of thousands more savers are either paying tax on their cash savings interest, or close to doing so.”

He explained some of the options you can use to avoid a tax bill on your savings, saying: “For those not already using their ISA allowances on investments, the £20,000 per adult ISA allowance should be utilised.

“For those with more sizeable sums, another option – if they are married – could be to move cash into whichever spouse might be subject to lower rates of tax.”

The Marriage Allowance allows a partner to transfer over £1,260 of an unused income tax personal allowance over to your partner.

Those searching for a better rate of interest on their cash savings should note that savings rates can vary and so if you are on a variable rate, it could later come down.

In light of this, you may want to consider going for a fixed-rate account. Rob Morgan, chief investment analyst at Charles Stanley, said: “The interest rate picture remains positive for savers with the best easy access rates still north of 4.5%.

“However, this inflation-beating rate of return is likely to narrow over time as the base rate moves lower. It may therefore be a good time to consider a fixed rate if you are happy to lock your money away because inflation and interest rate expectations may now fall back a little. A rate of around 4.5% is currently achievable for a one-year fixed term.”

At present, you can get fixed rates of 4.7% and above with several accounts with one- or two-year fixes, according to figures from moneyfactscompare.co.uk.