Savings: When to pay tax on returns as more savers dragged into HMRC net | Personal Finance | Finance
Nearly three in ten (29 percent) people do not know if or when they should pay tax on interest, new research reveals.
At the same time, one in ten (10 percent) wrongly believe they do not have to pay tax on the returns made on savings held outside of an ISA, according to research from Shawbrook.
The survey of 2,326 UK consumers (18+) – with at least 1,500 who are ‘active savers’ – also found that nearly two in five (38 percent) of active savers overestimate the personal savings allowance (PSA).
With the PSA sitting unchanged at £1,000 since being introduced in 2016, savers surveyed on average estimated you could save almost three times the actual limit at £2,649 before paying any tax.
Shawbrook’s research also highlights the confusion in declaring interest earned, leading to worries that many could be caught out.
Almost a third (32 percent) of savers surveyed don’t believe you need to declare how much you are earning in savings and more than a quarter (28 percent) incorrectly think you never need to complete a tax self-assessment for interest.
HMRC states that those who earn over £10,000 in interest need to complete a self-assessment form.
Despite the PSA limits in place, those saving into ISAs have a much more generous limit of £20,000 to save per year. Any interest earned within these accounts is tax-free. However, over half (53 percent) of active savers weren’t benefitting from the tax protection it provides.
The survey found that 16 percent of savers not using ISAs said they didn’t save enough money to be concerned about tax, and more than a fifth (22 percent) were concerned about having their savings locked away.
With over £815billion in non-ISA accounts, many might be running the tax gauntlet. The PSA remains frozen and elevated interest rates mean that the amount required to breach the tax threshold is a lot lower than it used to be.
Adam Thrower, Head of Savings at Shawbrook, said: “Taxation is never a simple topic, but when it comes to saving it’s vital that people understand the rules so they don’t get caught out.
“Savers are rightly wanting to take advantage of higher rates, but that makes it increasingly important to understand tax thresholds and how to maximise allowances to grow savings in a tax-efficient manner. ISAs remain the number one way for savers to do this.
“The top ISAs on offer currently have highly competitive prices, offering savers the chance for good returns and at the same time to protect their savings from tax.
“Declaring interest earned for tax purposes is something that most of us will be new to contending with.
“Recent data from CACI found that over 5 million accounts are at risk of tax. Currently, £22,000 in a high-paying one-year fix could put a basic rate taxpayer over the threshold, and this drops to £11,000 for higher-rate taxpayers.”
