The UK's tax authority, HMRC, is alerting individuals with bank balances exceeding £11,600 that they may need to pay tax on interest earned from their accounts. Personal finance expert Alice Haine emphasizes the importance of understanding how interest rates and tax thresholds work together, cautioning that savers with higher interest rates could face unexpected tax liabilities. Haine provides specific examples and recommendations for maximizing tax efficiency, including utilizing ISAs and considering salary sacrifice strategies.
HMRC has issued a warning to anyone with a bank balance exceeding £11,600, as they could face tax payments on interest earned from their accounts. Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, has stressed the importance of understanding how savings rates and tax thresholds interact. She explained that the tax threshold for savings depends on the interest rate and the frequency of tax calculation (monthly or annually).
Savers with higher interest rates may unexpectedly become liable for tax at lower savings levels than anticipated. Many savers are unaware they could owe tax on their savings interest at all.Haine provided specific details, noting that higher-rate taxpayers can hold up to around £11,600 in a savings account with a 4.31% interest rate before exceeding their £500 personal savings allowance and incurring tax on their interest earnings. Basic-rate taxpayers have a higher threshold, able to save just under £23,200 in an account with a 4.31% interest rate before triggering tax charges on their interest payments.To maximize tax efficiency, Haine recommends utilizing Individual Savings Accounts (ISAs). The £20,000 annual ISA allowance can be applied across different ISA types. A savvy saver could allocate a portion to a Cash ISA with the highest interest rate and deposit the remainder in a Stocks and Shares ISA to benefit from long-term investment returns. Furthermore, she suggests that individuals earning just above the £50,270 threshold, where the higher 40% tax rate applies, could consider salary sacrifice to potentially reduce their income tax burden and boost their pension savings. This strategy can also double their personal savings allowance. However, Haine cautions that accepting a lower salary through salary sacrifice may impact access to credit like mortgages due to reduced income. She also advises considering the potential impact on employee benefits such as life cover, holiday, sickness, and maternity pay
HMRC Tax Savings Interest Personal Finance ISA Salary Sacrifice
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