Savers could be slapped with surprise tax bills (Image: Getty)
A building society boss has warned savers they could be hit with a surprise tax bill if they cross an important allowance.
Pete Lewis, senior savings manager at , issued the word of caution as increasing numbers of people are going over the threshold to pay tax on their savings.
He explained: “With frozen thresholds and higher , more accounts are breaching the Personal Savings Allowance limit. Basic-rate [income] taxpayers can earn up to £1,000 in interest tax-free, but exceeding this can result in unexpected tax bills.”
If you are on the higher rate for income tax, your tax-free allowance shrinks to £500 and if you are on the additional rate, you don’t get any allowance at all.
Any tax that applies to your interest earnings is at the same rate as for you income tax band, so 20% for basic rate earners, 40% for those on the higher rate and 45% for the additional rate.
One way to build up your savings tax-free is to put funds into ISAs, as any interest or investments growth in these accounts is tax-free.
Mr Lewis said: “If you haven’t already, consider topping up your Individual Savings Account (ISA) before the end of the tax year. You can save up to £20,000 tax-free each year.”
This allowance can be split between different types of ISAs, including cash, stocks and shares, innovative finance, and lifetime ISAs.
The savings expert also pointed to how some savers could boost their interest earnings by more than £1,000.
Data sourced by consultancy firm CACI for Yorkshire Building Society found there was £362billion held in accounts paying 1% or less at the end of last year.
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The analysis also found there are almost 13 million current accounts in the UK with balances above £5,001, with the average balance for these people at £23,600.
Mr Lewis said: “If these people moved their balances into an easy access account they could be earning over £1,000 more in interest.”
At the time of writing, several providers offer rates of 4.7% or above for easy access accounts, meaning if you had £23,600 deposited in one of these accounts, you would earn £1,109.20 a year or more.
Looking at how could change this year, Amy Knight, personal finance expert at , said the base could drop to below four percent by the end of the year. It is currently at 4.75 percent.
With rates possible falling this year, she said: “People who have survived the crisis without depleting their savings should look to secure a fixed-rate saving account now. By locking in higher rates for two years or more, your savings will be protected against future decreases.”
Ms Knight had a further word of warning for those wanting to take out their cash to make a switch. She said: “Remember to think carefully about when you’ll need to withdraw the money, as many providers reduce the amount of interest they pay after a certain number of withdrawals.
“Holding savings in a range of instant access, easy access and longer-term fixed accounts is a good way to benefit from higher rates while leaving some cash within reach for emergencies or financial milestones you’re likely to hit in the near future.”