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Financial advisers warn that "many savers now risk falling foul of tax rules they may have long forgotten"

ended 09. October 2024

Financial advisers and money experts have warned that many savers will have forgotten that they have to pay tax on their savings — and that pensioners could be the most vulnerable. During almost 15 years of ultra-low interest rates post-Global Financial Crisis, savers had little cause to worry about tax as their savings generated little, if any, returns anyway. But since interest rates rose after the mini-Budget and to contain inflation caused by the war in Ukraine, many savings accounts have been delivering better returns. As one IFA puts it: “Two years ago, a saver with £50,000 would have received around £500 in annual interest, but now it's likely to be £2,000 or more. Enter HMRC, left.”

5 responses from the Newspage community

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Colin Low
Managing Director at Kingsfleet
The risk is real and is of particular concern to pensioners. With interest rates increasing during the 2023-24 tax year, pensioners finally saw the benefit of saving their hard-earned cash but have perhaps missed the fact that they now need to declare that higher level of interest income to HMRC. This is happening at the same time that accountancy practices do not have the resources to take on clients with lower levels of tax liability as it is uneconomic to do so. Likewise, HMRC have limited capacity for receiving enquiries from the public. Whilst most income is paid net of tax, from pensions and employment say, savings interest has been paid gross, namely without tax deducted, for a number of years. There is a savings allowance for Basic Rate Taxpayers of £1,000 but this is now insufficient to cover many pensioners' savings interest. Two years ago, a saver with £50,000 would have received around £500 in annual interest, but now it's likely to be £2,000 or more. Enter HMRC, left.
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Mark Scott
Director and IFA at Positive Advisers Ltd
This issue is compounded by the fact that some pensioners have already been put into a taxation situation because their state pension is beyond the tax-free amount people can earn each year. At annual reviews, I’m having to explain why the taxman is writing to them to claim money back. I’ve got one client in particular who finds the situation very stressful and is scared to take money out of her personal pension and spend because she’s worried about how the taxman is after her.
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Graham Wells
Founder and Financial Coach at GroWiser Financial Coaching
Given that we're not taught much about tax and savings at school or in the workplace, it's a near-certainty that thousands of people across the UK will be due tax on their savings interest this year, without realising it. Fortunately, much of it will taken care of automatically by HMRC, although some people may need to take action. Banks and other financial institutions report interest earnings to HMRC at the end of each tax year, so for those who are employed or receive a pension, HMRC can adjust tax codes and recoup tax directly from your income. For the self-employed, HMRC should let you know if any tax is payable on savings interest above the 'Personal Savings Allowance'. If your annual income from savings and investments is above £10,000, however, you need to register for self-assessment if you haven't already. Plenty of people with savings in the bank will pay extra tax this year, but whether ot not they notice that will depend on their level of financial awareness.
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Editor
Gabriel McKeown
Head of Macroeconomics at Sad Rabbit - Substack Newsletter
After 15 years of financial hibernation, the spectre of savings interest tax has risen from its slumber, ready to haunt your hard-earned returns. The recent surge in interest rates, triggered by the BoE's aggressive inflation-fighting stance, has breathed new life into savings accounts. However, this renaissance comes with a sting in its tail. Many savers now risking falling foul of tax rules they may have long forgotten. This risk is further exacerbated by the tax-free PSA remaining unchanged since its introduction in 2016. Furthermore, with income tax thresholds frozen until 2028, more savers are being pushed into higher tax brackets, reducing their PSA. While recent data from the FCA revealed that over £250bn is currently sitting in accounts earning zero interest. As more savers move to higher-interest savings accounts, savers must shake off the complacency bred by years of negligible interest and reacquaint themselves with the tax implications of their newfound yields.
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Riz Malik
Independent Financial Adviser at R3 Wealth
There is a big likelihood that savings income often gets missed off or discounted on tax returns particularly by higher rate tax payers.. HMRC’s state of the art software may ultimately pick this up but in reality they have bigger fish to fry.