Consumer champion Martin Lewis has issued a stark warning to UK households holding significant cash reserves, highlighting a growing tax risk for those with savings exceeding £20,000.
The tax trap for savers explained
The founder of MoneySavingExpert.com stated that a rising number of people face being taxed on the interest their savings generate. This situation has been exacerbated by Chancellor Rachel Reeves' controversial decision to maintain frozen income tax thresholds.
This policy of fiscal drag means that as wages and savings interest increase, more individuals are pulled into higher tax brackets, impacting their overall tax liability.
Understanding your Personal Savings Allowance
Lewis emphasised the critical need for savers to understand the Personal Savings Allowance (PSA), a government scheme that allows earners to receive a certain amount of interest tax-free each year.
He explained: "For a basic rate taxpayer, which is generally someone earning between £12,500 and £50,000 a year, your personal savings allowance is £1,000. That means you can earn £1,000 of interest from any legitimate UK sources and you do not have to pay tax on it."
With leading easy-access accounts offering around 5% interest, Lewis calculated that a saver would need approximately £20,000 in savings to hit that £1,000 interest threshold.
Who is most at risk?
The financial guru outlined the different allowances that apply:
- Basic rate taxpayers (20%): Can earn up to £1,000 in savings interest tax-free.
- Higher rate taxpayers (40%): Have a reduced allowance of just £500 per year.
- Additional rate taxpayers (45%): Receive no Personal Savings Allowance at all.
"So if you've got £20,000 or less in savings and you're a basic rate taxpayer, it is very unlikely that your savings interest would be taxed," Lewis noted. However, those with larger pots, or those nudged into a higher tax band by pay rises or frozen thresholds, need to be vigilant.
Lewis urged savers to proactively manage their finances, exploring government-approved schemes like ISAs to lawfully shield their interest from tax. At the start of a new year, he reiterated that understanding these rules is essential for anyone looking to grow their money efficiently and retain more of their hard-earned cash.
