HMRC has issued a tax warning to people with open savings accounts. The warning from the government tax body comes with UK taxpayers reminded the 'starting rate' for savings interest is currently fixed at £5,000 for UK households.
It means workers can earn up to this threshold in savings interest without being taxed. But different levels of additional income can affect eligibility for this allowance by consuming portions of the personal tax-free allowance, HMRC has warned.
HMRC noted: "Most people can earn some interest from their savings without paying tax." Allowances for earning interest before you have to pay tax on it include your Personal Allowance and starting rate for savings as well as your Personal Savings Allowance.
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The amount of PSA available to you depends on the Income Tax band which applies to you, and to work out which band you fall into you should add together the taxable interest you’ve received with your other taxable income.
Basic rate taxpayers get up to £1,000 but higher rate - who pay 40 per cent - only get up top £500. Additional rate taxpayers get zero. If you are a basic rate tax payer, you wouldn’t pay tax if you were to earn the following in one tax year: £1,000 interest in an ISA and £500 interest in a different savings account.
This is because the interest earned in an ISA does not count towards your PSA. Depending on your income it may also be possible to have up to an additional £5,000 savings interest taxed at 0% (this is called the starting rate for savings).
You may be able to benefit from a combination of the Personal Tax Allowance, the PSA and starting rate for savings to make some or all of your interest tax free. Everyone’s tax position is different, income types and amounts can change from year-to-year, and the reliefs can be subject to change at any time. It’s your responsibility, not ours, to calculate and pay any tax due.
