HM Revenue & Customs (HMRC) have sent an urgent message out to people that may have substantial savings sitting in their account.
The last thing anyone really wants to do is get into legal trouble for not getting their finances or taxes in check.
In response to a customer asking about their annual interest earnings and the tax that needed to be paid on it, HMRC had a detailed answer about what they should do, and if they need to complete a self-assessment tax return.
The tax body clarified if the customer needed to carry out a self-assessment tax return if their annual interest earnings were upwards of £2,000.
Although the answer may vary by savings account, they provided a general explanation.
They stated: “If you have more than £10,000 from dividends or savings and interest, you would need to complete a self assessment tax return.
“If you have a Individual Savings Account (ISA), this is tax free as well as some National Savings and Investment (NS&I) accounts,” the HMRC explained.
So if you are saving with an ISA, you will pay no tax on any interest or growth earned, up to £20,000 per year.
After this amount, you will have to pay tax on it.
Martin Lewis has previously spoken about the £10,000 in savings that may be sitting in accounts across the UK.
A starting rate for savings is also available for Brits to earn £5,000 in interest tax-free annually, though this goes down by £1 for every £1 earned above the personal allowance, which is £12,570.
Basic taxpayers can earn up to £1,000 in interest tax-free annually, which drops to £500 for higher taxpayers and down to £0 for those on the additional rate.
Where and how much you choose to save will affect how much you make from your investment (Getty Stock Photo)
If you’re a customer with National Savings and Investments (NS&I) though, you won’t pay tax on any prizes won in the monthly draw, while they also offer Direct and Junior ISAs.
Other methods of saving include Premium Bonds, which is more exciting, as you have the chance to win a prize each month, though the prize fund rate will be dropping next month, going from 4.15 percent to just four percent.
Prizes could be anywhere from £25 up to £1 million, with other sums up for grabs sitting at £50,000 to £100,000.
According to accountant David Kindness, who contributes to Best Money, ‘it’s generally recommended to invest larger sums’ with NS&I, ‘around £20,000 or more’.
“Those with smaller amounts often find their chances of winning anything slim, making the Bonds feel more like a lottery than a viable savings tool,” he explained.
He went on: “High-interest savings accounts or Cash ISAs could be better options.
“For example, NS&I’s Direct Saver account offers a 3.50 percent gross/AER rate, which provides predictable growth. These options lack the excitement of a prize draw but deliver reliable results,” Kindness highlighted.
Martin Lewis has issued an urgent warning to anyone with £10,000 or more worth of savings in the bank.
The Money Saving Expert founder, who’s been offering free budgeting advice to Brits for yonks, is back with another important reminder.
Over the past few years, Lewis says that the rules in regard to interest on your savings has changed.
Without realising it, you might owe His Majesty’s Revenue and Customs (HMRC) money because savings account interest rates have increased.
On The Martin Lewis Money Show Live, he said rates have gone up from around one percent to five percent.
Lewis explained: “So look, savings tax is back for many. When you get interest on your savings, it is eligible for income tax. It counts as income.
“But you get a Personal Savings Allowance. What this means is a basic rate taxpayer can earn £1,000 a year of interest and you don’t pay tax on it.
“It can be in any form of savings account that you like.
“As a higher 40 percent taxpayer, you can earn £500, as a top 45 percent taxpayer if you earn over £125,000 a year you don’t get one of these.
“So what does that mean in practice? So if you take that top five percent figure, as a basic rate taxpayer if you have over £20,000 in savings at five percent, you would earn more than a grand of interest so everything above that would be taxed.
“As a higher rate taxpayer it’s £10,000.”
So savers will basically pay tax on any interest over your allowance at your usual rate of income tax.
If you’re employed or have a pension, HMRC will change your tax code so you pay the tax automatically.
HMRC calculate how much interest you get in the current year by looking at how much you got the previous year.
Though Lewis also explained that most people are able to make up to £1,000 a year on interest without having to pay tax on it.
He said: “But you get a Personal Savings Allowance. What this means is a basic rate taxpayer can earn £1,000 a year of interest and you don’t have to pay tax on it. It can be any form of savings account that you like.
“As a higher 40 percent taxpayer, you can earn £500, as a top 45 percent taxpayer if you earn over £125,000 a year you don’t get one of these.”
