Does higher savings interest mean higher tax for you?

Beware the “Double Edged” Savings Sword …. alongside higher Mortgage rates 😖 UK Savings rates have increased significantly over the last 12-18 months too 😬

We are now seeing savings products paying 5%+ (see Zopa Bank, Cynergy Bank & Virgin Money or go to our friends at MoneySavingExpert.com). Current Accounts are also not far behind with the popular Santander Edge Up account (previously Santander 123) now paying 3.45% on up to £25k of balance – up to £862 of interest a year . Great news right?!

Well here comes the “Double Edge” ….. for anyone who is a higher rate taxpayer (£50,270+) – your personal allowance for savings interest is capped at £500 per tax year. In real terms that means if you have £14,490+ in your Santander account or c.£10,000+ in the highest paying savings products – be prepared to get a tax bill on this savings interest.

What can you do:

(1) Accept the additional tax and pay it when due – 5% interest after tax of 40% still gives you 3% interest on anything above your allowance

(2) Redirect savings balances to pay down your mortgage / personal debts (especially if you are now on a 3%+ mortgage rate as you will likely be paying more on mortgage interest than you are receiving by keeping the money in your bank account)

(3) Max out your £20,000 ISA. The allowances and tax rates do not apply to funds sat in ISA accounts which are tax exempt

(4) If you are on the threshold of tax brackets ensure you avoid any cliff edge impacts – for example going from a 20% tax bracket to 40% and seeing your allowance drop from £1,000 to £500. How … make additional contributions to your pension to manage your income below the threshold (and in the process get tax back on your contributions … a double win!)

(5) Subscribe to the Personal Finance Hub to keep up to date on valuable personal finance insight and guidance – https://lnkd.in/evFzmm6X