The return and importance of Individual Savings Accounts

13.10.2023
Calvin Roll
Tax

For over a decade interest rates had been at a historic low and in the last 18 months have perhaps returned to ‘normal’. Whilst that is bad news for borrowers it brings some welcome returns to those with savings, but could the taxman come calling?

As with most things tax, this is going to depend on your personal circumstances. Basic and higher rate taxpayers have Savings Allowances of £1,000 and £500 respectively which until recently, given the negligible returns on offer, was more than sufficient in most cases to cover interest received. However, now that the tide has turned and the returns on offer for savers have increased significantly, even those with relatively modest savings could find themselves paying tax on interest and would prefer not to.

For those with lower incomes, for example pensioners with pensions not exceeding the basic rate band, the starting rate for savings could mean interest of up to £6,000 is tax free, see: - Tax on savings interest: How much tax you pay - GOV.UK (www.gov.uk)

Most working people and pensioners with occupational or private pensions are however now likely to be facing a tax liability on savings if their interest is in excess of the savings allowance. Furthermore, if you are now fortunate enough to be receiving income from savings and investments over £10,000 per annum there is a requirement to register for Self-Assessment.

How can you minimise the tax paid on interest

After years of almost negligible returns on savings and taxable interest for all but the highest earners being covered by the savings allowance, the answer can be surprisingly simple in that many taxpayers have perhaps not been utilising their Individual Savings Accounts (ISA) allowance which is currently £20,000 per annum. Interest earned within a cash ISA is not taxable and therefore it is relatively easy to minimise or eliminate a tax liability on savings interest.

The savings can quickly add up if for example a higher rate taxpayer has savings of £20,000 earning interest of 5% per annum that gives rise to interest of £1,000. Outside of an ISA, tax would be payable on the interest of £200 whereas if earned within an ISA that would be nil.

As the ISA allowance is an annual allowance, those with larger savings pots can increase the tax savings year on year by making sure the ISA allowance is utilised annually.

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