As interest rates rise to levels not seen since the 2008 banking crisis, savers should be aware of the implications for the 2023/24 tax year. It’s important to plan ahead and take action early in the tax year.
Previously, bank interest was paid with a deduction for tax, but now it’s paid gross and needs to be declared to HMRC each tax year. Your bank interest is added to your total taxable income and affects your personal savings allowance (PSA). If your total taxable income is less than £50,270, the first £1,000 of bank interest is charged at 0%, and any interest above this is charged at 20%. If your income is between £50,270 and £125,140, your PSA is £500 and charged at 0%, and any interest above this is charged at 40%. If your income is higher than £125,140, you don’t receive any PSA, and all your bank interest is taxed at 45%.
Adding your bank interest to your other income can have various tax implications, such as making you a higher or additional rate taxpayer and affecting your PSA or personal allowance. You could consider placing savings into a spouse’s name to make use of any tax allowances you both have, but this will depend on your spouse’s tax position, and the transfer must be an outright gift.
It’s important to be aware of the parental settlement rules, which prevent parents from gaining any benefit when placing savings into their children’s name. If parents gift money to their minor children and the interest exceeds £100, the parent will be taxed on all income as if it is their own. This can be avoided by using Junior ISAs.
To make the most of tax allowances in the 2023/24 tax year, consider using Individual Savings Accounts (ISAs), NS&I Premium Bonds, making personal pension contributions, or placing savings into a spouse’s name to reduce taxable income.
To discuss your personal tax circumstances, contact the CBReid Tax Team today.