Financial guru Martin Lewis advises individuals with savings exceeding £10,000 on how to avoid paying tax on their interest earnings. He highlights the benefits of utilizing Cash ISAs and understanding personal savings allowances.
Financial guru Martin Lewis has highlighted a crucial strategy for individuals with substantial savings to avoid paying tax on their interest earnings. The founder of MoneySavingExpert.com warned that those with over £10,000 in savings could potentially face taxation on their nest egg. In a recent briefing, Martin Lewis addressed the common pitfalls that many savers fall into, often resulting in an unexpected tax bill from HMRC on their hard-earned savings.
He specifically focused on the concerns of earners between £12,500 and £50,000 annually who might exceed the personal savings allowance limit. Lewis explained that savers within this income bracket would start paying tax on their interest once their savings exceed £20,000. Furthermore, he pointed out that for those taxed at 40 percent, typically on incomes ranging from £50,000 to £125,000, the threshold before tax kicks in is £10,000 in savings. However, Lewis reassured savers that there are legal steps they can take to avoid these taxes. He advised: 'How do you protect yourself from that tax? Well, the biggest scheme and the most obvious one is a cash ISA, an individual savings account. A cash ISA is simply a savings account you don't pay tax on. You can put £20,000 in per tax year.' Lewis elaborated on the timelines: 'Tax year starts on the 6th of April, ends on the 5th of April. Once you put the money inside a cash ISA, it's protected from tax.' Mr. Lewis highlighted the various ISA options available, noting that some allow easy access for deposits and withdrawals, while others are fixed. He explained: 'They're basically it's just a savings account in a special tax wrapper that you don't pay tax on. Now the important thing about a cash ISA is you can put your money in, it's then protected from tax, so money in there, you don't pay tax on it and it doesn't count towards the interest in the personal savings allowance, this is on top of that.' He further explained the tax benefits of using a cash ISA: 'As long as it stays inside the cash ISA, you could put £20,000 in this year. Well, let's say you can then put £20,000 in the next tax year, so that's £40,000. And then in the next tax year, so that's £60,000, so if you are lucky enough to be able to max it out each year, you could protect more and more and more of your savings inside the cash ISA without having to pay tax on it. So for those who've got a good whack of savings, it's very worthwhile to look at a cash ISA because, well, as a 20% rate taxpayer, you'll be 20% of your interest would be taken away in tax if you're above the personal savings allowance.' Martin Lewis has shared a savvy financial tip on how savers can protect their interest from tax: 'It won't in the cash ISA. Higher rate or top rate taxpayer, that's 40% of your interest or 45% of your interest that will be taken away. It won't be in the cash ISA. The other thing that you can look at that's very easy to do is premium bonds. The prizes that you earn from premium bonds, premium bonds are where you put your money away, the money you put in is safe, but you then get paid interest depending on a prize draw.' He further clarified how taxation on savings interest works, emphasizing the benefits of a personal savings allowance for certain taxpayers: 'Talking about those people who are generally paying tax, the most important thing to understand is you will probably have a personal savings allowance. This is a special amount of savings interest that you can earn each year, which isn't taxed. Now if you're a basic rate taxpayer, a 20% rate taxpayer, which is generally someone earning between about £12,500 and £50,000 a year, then your personal savings allowance is £1,000.' Highlighting the significance of this allowance, he added, 'That means you can earn £1000 of interest from any legitimate UK sources and you do not have to pay tax on it.' Mr. Lewis also pointed out the current returns from the highest paying easy-access accounts: 'So how much would you have to have in there to earn a grand's worth of interest? About £20,000.' MoneySavingExpert Martin Lewis has provided insight for savers on how to navigate the tax implications of their earnings. He remarked: 'So if you've got £20,000 or less in savings and you're a basic rate taxpayer, it is very unlikely that your savings interest would be taxed, so you don't have to pay anything so you can get on with it.' Clarifying further, he said, 'If you're a higher 40% rate taxpayer, which is someone earning over around £50,000 up to about £125,000, then your personal savings allowance is £500 a year.' He indicated that for those with a 40% tax rate, having £10,000 in a top easy access account would result in taxation. Lewis highlighted: 'If you are a top rate taxpayer, so earning over £125,000 a year, you do not get a personal savings allowance. So all of your savings interest is taxed.
MARTIN LEWIS SAVING TAX CASH ISA PERSONAL SAVINGS ALLOWANCE INTEREST HMRC
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