While the rise in interest rates is welcome to many, savers are facing the prospect of paying tax on their savings for the first time in some years.
Rises in salary earnings are also pushing a larger number of people into the higher rate or additional rate income tax band, effectively leaving them with no room to make significant tax-free savings.
Those who are basic rate taxpayers can earn up to £1,000 in savings interest per year without paying tax. Higher-rate taxpayers have an allowance of £500 in tax-free interest earnings.
However, additional-rate taxpayers have no allowance. These allowances cover interest earned from bank and building society accounts, bonds, and gilts. Dividend income from shares is dealt with via a separate allowance, which has also been cut from £2,000 to £1,000 with effect from 5 April 2023.
Interest saving rates have risen from around half a per cent to just under three per cent on typical savings accounts and ISAs.
The turnaround from moribund rates to those delivering a more substantial return has meant the amount of money invested that then attracts tax has dropped significantly.
Advisers are urging savers to make use of the annual ISA allowance that allows savers to deposit up to £20,000 per year to offset possible payment of tax on savings-related earnings.
If you need more information on how these issues affect you and your tax bill, please get in touch with our tax experts for help and advice.