Martin Lewis £1,000 alert for anyone with a fixed rate savings account | Personal Finance | Finance

Personal finance expert Martin Lewis has given a warning to anyone with a fixed savings account – and said it could mean you’ll be hit with a tax bill. Mr Lewis was speaking on his new BBC Podcast this week on the issues of savings tax.

The personal finance guru outlined two crucial limits – £10,000 and £20,000 – that individuals need to keep in mind, depending on their income levels and the interest rates. And he said there are limits for what people can earn in savings interest and anyone getting more than £1,000 would have to pay tax.

Mr Lewis explained: “When you get interest on savings it’s taxable. There are a lot of allowances so the majority of people in the country do not pay tax on their savings interest. You can earn as a basic rate taxpayer £1,000 of interest a year before you pay tax. A higher rate taxpayer £500 of interest. If you’re a non taxpayer your interest counts towards your basic personal allowance and there’s a starting rate of savings anyway.”

On the podcast Mr Lewis dealt with the issue of fixed savings accounts or bonds – and how people may fall foul of a little-known HMRC rule which means even thought he interest is paid over a number of years they still end up paying tax on the final year.

Listener Matt asked “HMRC keeps incorrectly estimating my interest on savings I no longer have to my detriment via PAYE tax code adjustments. Why are their calculations non-transparent. Why can’t they show the accounts and values behind their calculations and how do I avoid overpaying tax on savings?”

Tax expert Rebecca Benneyworth, chartered accountant, said: “So essentially they will estimate based on the previous year, or indeed it might be several previous years and you’re right, they are very slow. I’ve just had a lady that I’ve helped out with this. She had had a rental property many years ago and

stopped renting it out 7 years ago. They continued to overtax her through PAYE on her private pension and so I wrote a letter for her. You do need to go to HMRC and tell them.

“I’m a bit surprised you say it’s not transparent as your coding notice will say why they’ve reduced your tax code.” Martin interjected: “But it won’t detail each account individually will it and that’s the lack of transparency.”

Rebecca added: “No it will very often be a round sum.” Martin said: “Write a formal letter detailing this going through it and it’s the type of thing AI is good at helping you with although obviously you check every single thing that goes in there, to tell them this is not on and you shouldn’t be doing it and hopefully someone will investigate.”

On tax on interest in joint accounts ‘does it get split equally or is there some calculation based on respective tax codes.’ Martin said: “It gets split equally is the very simple answer on that.”

Host Adrian Chiles asked: “Had a 2 year bond mature last year but as all the interest was added to the balance on maturity it put my interest outside of ISAs over £1,000 and I therefore had to pay some tax. If the interest had been allocated to the two separate years this would have not have been the case. This does not seem fair as the interest was quoted as being per annum. I do watch this carefully and would have put more into an ISA if I had realised.”

Martin said this was an issue he has been looking at and campaigning on. He said: “The rule on savings interest is the interest is crystallised for tax purposes in the year that you can access the interest. So if you have a fixed rate savings account like a fixed savings bond even if the interest if paid annually if you can’t take that interest out then that interest has not accrued for tax purposes until the point you can withdraw it and many fixed rates bonds where you have annual interest you can only access the interest when you can access the money in the bond.

“In which case it vests for tax purposes in the year when it is paid out. If you’ve got a bond which is paying you monthly interest into a separate account then that would be vesting each time the interest is paid. It’s very important – it’s not whether you access the interest, it’s not whether you take the interest, it;s whether the interest is accessible.

“I have concerns based on the previous individual we’ve been talking about which is why I’ve been campaigning on it that HMRC is often being fed information from the banks from the people who aren’t doing self assessment returns based on when the interest is paid rather than when the interest is accessible.”

Expert Kari Mellon director of Opestax limited confirmed the interest is only taxable when it’s accessible. She added: “It’s really important when looking at these bonds to be clear and ask the providers when can you get access to that interest.”

Martin said: “When you get a fixed rate savings account what you need to look at is not when the interest is paid but when the interest is accessible. Now, that may be good for you. Let’s say you’re two years away from retirement, you get a five year bond that’s paying a decent whack of interest you get a five year fixed savings account and it vests in retirement when you’re paying a lower tax rate than you currently are that would actually mean you pay less tax for the first two years if the interest it taxable and you’re above your personal savings allowance.

“But equally it could work the other way round if you’re going to be a higher rate taxpayer later. So actually choosing the bonds sometimes based on when the interest will vest is important.”

To listen to the full podcast click here.