Date posted: 24th Jul 2023
As interest rates continue to rise to levels unseen for many years, taxpayers could face a shock in relation to paying tax on interest earned.
It is important to remember that since April 2016, the banks stopped deducting 20% basic rate tax on interest and paid the interest gross i.e. free of tax.
At the same time, HMRC introduced some savings allowances (interest taxed at 0%) – these were £1,000 for those paying tax at basic rate and £500 for those paying tax at higher rate.
Whilst there are other reliefs such as the personal allowance and confusingly another 0% tax band for those that don’t earn above the personal allowance but have up to £5,000 of savings interest, it would be prudent for those with savings to check their position in respect of tax, given that they will be earning more interest than they have in the last ten years or so and could face a shock tax bill at the end of the tax year. There may be options to try to reduce the tax bill too by taking advice early.
On a similar vein, the amount of dividend income that can be earned free of tax is now lower at £1,000 and will reduce to £500 in 2023/24, so investors may also face a tax bill that they may not have faced in the past due to the reduction of these allowances.
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