NatWest has urged savers to beware as many face a higher tax bill this year.
Britons are expecting to save more this year as interest rates remain high, however they are unaware that this interest could result in them being eligible to pay tax for the first time.
Almost a third (31 per cent} of savers are expecting to save more and almost half (44 per cent) expect to save the same this tax year.
However, according to the latest survey by NatWest, more than one in three (36 per cent) do not know they may be eligible to pay tax on the interest earned on their savings.
The number of people paying tax on the interest from their savings has jumped significantly.
A freedom of information request from investment platform AJ Bell found that HMRC expected more than 2.73 million people to have to pay tax on their savings interest in the 2023/24 tax year.
Back in 2020/21, fewer than 800,000 savers paid tax on their savings interest
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That includes 1.37 million basic rate taxpayers. That’s a rise of around a million overall on the 2022/23 tax year. Back in 2020/21, fewer than 800,000 savers paid tax on their savings interest.
Most people are benefitting from having a Personal Savings Allowance – this is how much interest each person can earn on their savings each year before they have to pay tax on that return.
It currently stands at £1,000 for basic rate taxpayers, and £500 for higher rate taxpayers. If someone is an additional rate taxpayer then they don’t get an allowance.
As the base rate sits at 5.25 per cent, savers can benefit from similar interest rates on savings accounts.
As a result, increasing numbers of savers face handing over some of the interest payments to the taxman.
One way to avoid paying interest on savings is paying into an Individual Savings Account (ISA).
The main difference between an ISA and any other savings account is that it offers tax-free interest payments. So savers could get more for their money.
Almost seven in ten (69 per cent) savers expect to earn interest on their savings this year and could be eligible to pay tax on the interest they earn.
In the year ahead one in three (31 per cent) are planning to save more, meaning this number could grow further in the year ahead.
To encourage savers to make the most of their allowance, NatWest is offering 4.6 per cent interest on a one-year fixed rate ISA.
However, savers can get a higher interest rate with other Cash ISA providers.
Experts have suggested that even if people don’t need the tax benefits of an ISA, they may want to opt for one anyway in order to get higher rates as they are paying more than easy access savers.
According to moneysavingexpert.com, Cynergy Bank pays the top rate for online accounts with unlimited withdrawals at 4.82 per cent
The top online account with restrictions is Paragon Bank offering 4.95 per cent with a min £1,000 deposit. This account lets savers withdraw twice per year (after this they’ll get 1.5 per cent from the third onwards).
Lewis Broadie, NatWest savings expert said: “Whatever your savings goals, let’s get saving.
“Whether you’re looking to save for something special or building a rainy-day fund, start the tax year strong and make the most of your tax-free ISA allowance to help you achieve your savings goals.”
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NatWest offers a range of savings tools to help younger people build a savings habit and balance.
Round Ups enables customers to round up a transaction to the nearest pound and save the extra.
To help with developing a savings habit NatWest also offers a Digital Regular Saver account with a rate of six per cent.
The new tax year started on April 6. Consumers can deposit up to £20,000 per tax year into an ISA without having to pay tax on the interest.
It is also possible to transfer balances from an existing ISA account.
