Millions set to pay tax on their savings – what can you do?

Around 2.7 million people will pay tax on savings interest in 2023/24.

That’s a million more than last year. Including half a million basic-rate taxpayers.

Why?

It was only a few years ago when interest rates were close to zero. So, you’d have received a lot less interest on cash held in savings accounts.

Fast forward to late 2023, and you could easily find rates up to 10x higher. This means there’s more interest to tax, but the personal savings allowance hasn’t risen to match it.

Here’s an example.

Two years ago, the average one-year fixed rate would give you less than 0.5% interest. That’s means a basic-rate taxpayer would have needed at least £200,000 in a savings account before you’d have reached the personal savings allowance. Higher-rate taxpayers would’ve needed £100,000.

Now, you’d need much less. With average one-year rates close to 5%, you’d only need £20,000 or £10,000 to be at risk of paying tax on savings interest.

Additional-rate taxpayers don’t have a personal savings allowance anyway. But the cut to the additional-rate threshold means more people will see their allowance disappear.

As a result, some taxpayers are looking to the Cash ISA as a solution.

This article isn’t personal advice. Inflation reduces the future spending power of money. 

The Cash ISA boom

A Cash ISA lets you save up to £20,000 per tax year as part of your overall ISA allowance, without paying any tax on the interest you earn.

Historically, low interest rates and a seemingly generous personal savings allowance caused Cash ISAs to dwindle.

But in 2023, the Cash ISA market grew by nearly £50bn.

The boom was down to a couple of factors.

First, concern over savings tax began building early in the year.

Second, record breaking Cash ISA rates meant you could earn over 10x the amount of tax-free interest than two years before.

Picking a Cash ISA this tax year

As with picking any savings account, the Cash ISA you choose should reflect your needs.

For money you need at your fingertips, you could look to easy access (variable rates with unlimited access to your money). Or the slightly higher rate-paying limited access (variable rates, but you can withdraw a limited number of times per year without charge).

Any money you can afford to lock away could go into a fixed-rate Cash ISA. You’ll probably get a better rate in return, but usually can’t withdraw your money until the term ends.

This tax year, you can only pick one Cash ISA at one provider, which means committing to a decision.

But the HL Cash ISA lets you spread money across fixed-rate, easy-access, and limited-access products, offered by different banking partners.

Through one login, you can switch as much as you’d like throughout the tax year – without paying any charges.

Products can be added or withdrawn at any time. Tax rules can change, and any benefits depend on your circumstances.

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).