Personal Savings Allowance could mean tax bill shock for fixed-rate savers
Savers with money in a fixed-rate bond may get a surprise bill.
New tax rules could require some savers to pay tax on money they haven't even received yet, leaving many struggling with unexpected bills.
Under rules that came into force on 6 April, all savers are no longer taxed on interest when it is paid into their account. If you are a basic-rate taxpayer, you are allowed to earn up to £1,000 interest a year before Income Tax kicks in.
For higher-rate taxpayers, the new Personal Savings Allowance is capped at £500 interest a year, and additional rate taxpayers must pay Income Tax on all their savings interest that isn’t earned within an ISA.
The changes to how your savings are taxed mean that banks will now pay your interest gross, rather than taking basic rate tax automatically. If you earn more interest than the Personal Savings Allowance permits for your tax bracket then you will need to fill out a tax return to pay what is owed.
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Unfortunately, some people may find they owe tax on savings they don’t have access to. This is because if you have a fixed-rate bond, in many cases, the interest is added to the account annually even though you may not have access to it for years.
Tax on that interest is due in the year it is paid, so you could need to pay tax before the account has matured. And it's not just those with traditional fixed-rate accounts that are affected - last year, many thousands of savers rushed to snap up three-year Pensioner Bonds and could find themselves in the same hole.
“The liability for tax will arise when the interest is added to the account, regardless of the fact customers may not cash in until the end of the term,” a spokesperson for National Savings & Investments told Money Mail.
Will it affect me?
This depends on a number of factors. Firstly, how interest is paid on your accounts. Some fixed-term bonds add the interest annually while some don’t add interest until the bond matures.
If your interest is paid annually then you need to calculate whether you will earn more interest than is allowed under the Personal Savings Allowance.
Bonds that pay all the interest upon maturity could also cause tax shocks because the taxman will count that interest in the year it is added to your account and you can't spread it over the years the bond existed.
As a result, you could find yourself exceeding your Personal Savings Allowance for that one year due to a hefty interest payment.
If you have exceeded the allowance for the tax year you will need to fill out a self-assessment form declaring the interest to the taxman. As the Personal Savings Allowance only came into effect this April the first self-assessment forms will not be due until October 2017.
“The new Personal Savings Allowance is great but it is messy,” says Sue Hannums from SavingsChampion.co.uk.
“The days of simple savings are gone and anyone taking out a fixed rate bond will now need to factor in the potential tax bill when choosing an account. This could deter people from taking out fixed rate bonds, but only time will tell.”
Read more about the new allowance at Personal Savings Allowance: how it works and where you should put your money
Compare a range of easy access and fixed rate savings accounts with loveMONEY
Learn more about savings:
Why current accounts just got even better
3 ways to get richer from today's savings revolution
Savers taking bigger risks to improve returns
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