Tax implications of the rise in interest rates
Following a period of low interest rates, we are now seeing the Bank of England base rate at its highest level since the banking crisis in 2008.
For savers, the rise in interest rates is positive however there are some points which you should be aware of moving into the 2023/24 tax year. It is wise to plan ahead for this, so action should be taken at the start of the tax year.
Prior to April 2016, all bank interest was paid with a deduction for tax. This has since changed and all bank interest is paid gross – you need to declare this to HMRC each tax year if taxes are due on your bank interest. Your bank interest forms part of your total taxable income.
If your total taxable income is:
- less than £50,270 the first £1,000 of bank interest falls into your personal savings allowance (PSA) and charged at 0%. Any interest above £1,000 is charged at 20%.
- between £50,270 and £125,140 your PSA is £500 and charged at 0%. Any interest above £500 is charged at 40%.
- higher than £125,140 you do not receive any PSA so all of your bank interest is taxed at 45%.
It is important to note that your bank interest needs to be added to your other income to determine your total taxable income. This can give rise to other tax implications. For example, your bank interest could:
- result in you becoming a higher rate taxpayer and your PSA will reduce to £500
- result in you becoming an additional rate taxpayer and your PSA will be lost
- result in your income tipping over £100,000 and then you start to lose your personal allowance of £12,570
- increase the amount of the high income child benefit charge – your child benefit starts to be repaid
- mean that you need to reduce your savings into a pension due to the tapering of the annual allowance as your total taxable income increases
- result in removal of your marriage allowance
It is important to start organising your wealth at the start of the 2023/24 tax year to make use of any tax allowances you may have, such as:
- Individual Savings Accounts – you can add £20,000 each into ISAs each tax year and the interest does not need to be declared to HMRC
- NS&I Premium Bonds – any winnings are free from taxes
- Making personal pension contributions – to bring your adjusted net income down for tax purposes
- Placing savings into a spouse’s name if they have a different level of income or personal allowances available.
Do remember that the parental settlement rules remain in place. Parents are able to place savings into their children’s name, but anti avoidance rules prevent parents from gaining any benefit to this. Where parents gift monies to their minor children, and the interest exceeds £100, the parent will be taxed on all income arising as if it is their own. This can be avoided by using Junior ISAs but if that child has a Child Trust Fund in place you are unable to hold a Child Trust Fund and a Junior ISA at the same time.
Please note that these figures are correct on 21st March 2023 and based on our understanding of the tax rules for 2023/24 tax year.
The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.
You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.
Kreston Reeves Financial Planning Services Limited, Independent Financial Advisers. Authorised and regulated by the Financial Conduct Authority.
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