MILLIONS of households are being warned that they could be hit with an unexpected tax bill for the first time as savings rates soar.
Basic-rate taxpayers get a £1,000 savings allowance each year, which is the amount you can earn in interest before you pay any tax.
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For higher-rate taxpayers, the allowance is £500 a year instead.
Interest rates have been at rock bottom in recent years, meaning you’d have to have an awful lot of money stashed away to max out this allowance.
But the Bank of England (BoE) hiked interest rates for the twelfth time in a row in May when the base rare rose to 4.5%.
A rate rise is generally good news for savers, as some banks have been bumping up interest rates on savings accounts.
There had been concern that banks were not passing on higher interest rates to savers, but saving rates are now starting to improve.
On the one hand, this is good news for savers because they’re getting more back, but it means that they’ll be more likely to have to pay more tax because they’ll breach the personal savings allowance.
HSBC is boosting the interest rates on some savings accounts with increases of up to 0.75 percentage points, the bank has announced.
The increases will come into effect next week, on Thursday June 8.
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They include a 0.75 percentage point increase on the bank’s mysavings and premier savings youth accounts, taking rates to 5%.
First Direct also announced savings rate increases that will also take place from June 8.
This follows the launch this week of First Direct’s one-year, fixed-rate saver account, at a rate of 4.60%.
As well as increasing rates on some accounts, First Direct is still offering 7% on its regular saver account.
NatWest and RBS also have regular saver accounts offering 6.17% interest, according to finance website Moneyfacts.
Rachel Springall, a finance expert at Moneyfacts said: “As a whole, the savings market has been blessed by rate increases thanks to a combination of the Bank of England rate rises and competition.
“Away from the biggest banking brands, challenger banks continue to jostle for table-topping positions to entice savers’ deposits, so it’s wise to keep a close eye on the moving market.”
The tax on your savings will depend on how much interest you make, but also on your overall tax position.
Some people can make far more in interest before paying tax, so it’s worth understanding the rules.
If you earn less than the personal allowance of £12,570, you can use the rest of it to cover savings interest.
So someone earning £11,000 would start by using £1,570 of their personal allowance.
If you’re on a low income, you also get the so-called starting savings rate.
You can get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings.
If you earn under £12,570, you also get an allowance of £5,000.
So that person earning £11,000 could make £6,570 in interest before paying any tax on their savings.
If you earn between £12,570 and £17,570, you’ll get a chunk of the starting savings rate.
This shrinks by £1 for every £1 you earn over the personal allowance threshold.
At that stage, because you become a basic rate taxpayer, you’ll also get the personal savings allowance of £1,000.
So someone earning £13,570 would get £4,000 at the starting savings rate and £1,000 of personal savings allowance.
This could make £5,000 in interest before paying tax.
If you earn between £17,570 and £50,270, you’ll just get the personal savings allowance of £1,000.
How can I protect my savings?
It pays to do some research before deciding where to put your cash.
You can protect your savings from tax within a cash ISA.
Research websites like MoneyFacts.co.uk and price comparison websites such as Compare the Market, Go Compare and MoneySupermarket will help save you time and show you the best rates available.
These sites let you tailor your searches to an account type that suits you.
Meanwhile, savers looking to make the most of higher rates on easy access accounts have been warned – there could be a catch.
Plus, six things homeowners must do as over a million fixed-rate mortgages end.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected]
