HMRC to contact six million UK households over 2016 savings tax rule
Millions of UK households are set to receive a letter from HMRC after inadvertently breaking a 2016 rule, with six million savings accounts likely to exceed the tax threshold set by the previous Labour government, resulting in an unexpected tax bill.
Over six million accounts surpassed the Personal Savings Allowance (PSA) in January, a limit introduced in 2016 allowing savers to earn some interest without paying tax.
Sally Conway, a savings specialist at Shawbrook, warned: "Without careful consideration, savers could face a shock tax bill on their nest eggs."
She added: "With savers still taking advantage of competitive interest rates, many could be sleepwalking into a tax bill on their interest.
"This is particularly relevant for higher-rate taxpayers, who only get £500 tax-free, and additional-rate taxpayers, who get none. For example, a higher-rate taxpayer with £12,000 in a non-ISA account earning 4.30% could exceed their tax-free allowance."
Ms Conway said: "There are currently over five million more savings accounts at risk of tax than there were just over three years ago. This outlines just how much the frozen threshold has impacted savers who aren't making use of ISAs.
"It can be a great way to boost savings in a tax-efficient manner. Additionally, exploring options beyond major banks might lead to better interest rates, often specialist savings banks can be savers' best-kept secret."
The personal savings allowance means basic rate taxpayers can earn £1,000 of interest from their savings each year tax free, but this is slashed to £500 for higher rate taxpayers and is zero for those paying 45p tax, reports BirminghamLive.
Frozen income tax thresholds are dragging increasing numbers of people into paying higher rate tax on the savings interest they earn.
This means that those earning more than £50,270 will lose 40 per cent to tax on any interest of more than £500 per year.
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