HMRC warning for people with £7,500 in savings account

Savers with £7,500 tucked away have been cautioned about potential tax implications by a finance expert, who highlighted common errors that could lead to unexpected HMRC bills amidst the Cost of Living crisis.

Laura Suter, director of personal finance at AJ Bell, warned: "While lots of people are using ISAs to protect their money from tax or organising their savings to cut their tax bill, there are some sneaky tax traps that will catch some savers out without even realising it."

She elaborated on the personal savings allowance, noting: "For example, the personal savings allowance protects lots of people from paying tax on their savings, as it means basic-rate taxpayers can earn £1,000 in savings income before they pay tax on it, while higher-rate taxpayers have a £500 allowance," but cautioned that "But lots of people will breach this limit this year maybe without knowing."

Ms Suter also pointed out five lesser-known "traps" that could ensnare unwary savers. Regarding fixed-rate accounts, she advised: "Lots of people are picking fixed-rate savings accounts at the moment, locking their money up for one, two, three or even five years to get a guaranteed interest rate."

"But you are taxed on the interest on your savings when it is accessible by you, so if you pick a fixed-rate savings account that pays out all the interest at maturity, for tax purposes all of that interest will be counted in one tax year. This means that the interest from just one account could take you over your Personal Savings Allowance on its own."

Having £7,500 in savings in the current top three-year fixed-rate account paying 4.51% would pay out £1,061 interest at maturity if it compounded annually, taking a basic-rate taxpayer over their Personal Savings Allowance for that year, reports Birmingham Live.

"To get around this trap you could opt for an account where the interest is paid out monthly or annually, meaning it is spread across different tax years. Or you can opt for a fixed-term ISA savings account, where you won't pay any tax on the interest," Ms Suter said.