Background
Savings interest has been paid without the deduction of tax for some time now and that change coincided with the introduction of a tax free personal savings allowance (PSA). Historically most people have not needed to worry about paying tax on their savings income as interest rates have been so low that the PSA has been sufficient to cover most cases. However, with higher interest rates during the last 18 months or so more taxpayers are likely to find their savings income will have risen towards, if not over, their PSA during the 2023/24 tax year and potentially for the current 2024/25 tax year.
In addition, the tax-free dividend allowance and capital gains tax annual exempt allowance have decreased in 2023/24 and again for 2024/25.
Therefore, many individuals may find that they will be required to pay tax on their savings income, dividend income or capital gains possibly for the first time or for the first time in many years. It is important that individuals check their position so that they can meet the reporting requirements for 2023/24 and pay any tax by the due date of 31 January 2025.
Detail
The PSA provides a tax-free allowance on an individual’s savings income and the allowance has remained unchanged since it was introduced more than eight years ago in April 2016. Basic rate tax payers are entitled to a PSA of £1,000, and higher rate tax payers have a PSA of £500 before having to pay any income tax on their savings income. Additional rate taxpayers earning over £125,140 receive no exemption and pay tax on all cash interest outside of any tax exempt saving such as an ISA.
The higher level of interest rates are likely to mean that many individuals will have more interest on their savings than in previous years and therefore need to be aware that they may now have tax to pay on this income. As banks share interest figures directly with HM Revenue & Customs (HMRC) this is readily verifiable by HMRC. Taxpayers who already complete a self-assessment return will declare any savings interest, and any tax due, when they complete their annual tax return. However, for those individuals taxed under PAYE, HMRC will calculate any tax due based on information sent to them by banks and building societies. It could mean that taxpayers may not be aware they have any tax to pay until there is a deduction made in their payslip each month.
One potential trap that individuals should be aware of is fixed rate accounts. Longer term accounts, where money is sometimes not accessible without a charge, will often only pay out interest at the end of the chosen term, possibly after three or five years. So while a five-year fixed rate account can offer better interest rates it should be remembered that an individual is taxed on interest when it is accessible. So on a fixed rate account paying all interest out at maturity, for tax purposes all of the interest will be counted in one tax year potentially taking an individual over their PSA on its own.
One way to mitigate this end loaded tax impact of the interest would be to look at accounts offering interest paid on a monthly or annual basis, enabling the interest to be spread across different tax years. Of course there is also the option to consider investing in an ISA where interest can be earned tax free and does not impact on the PSA.
Individuals must also consider how interest from a joint savings account may impact them. Sometimes individuals do not realise that such interest is split 50:50 between the two account holders and therefore they may have taxable interest that they had not considered. A joint account can also be beneficial for example if interest of £1,000 is earned then each partner has £500 interest towards their own PSA, rather than taking it over one partner’s whole allowance. Equally where one half of a couple is in a lower tax bracket it could make sense to move the savings into an account in their sole name so it is taxed at a lower rate, or potentially move funds to the partner who may not have fully utilised their PSA.
Dividend Allowance
Since April 2018, taxpayers receiving dividend income have not had to pay tax on the first £2,000 of dividend received each year. This allowance has meant that many individuals with small shareholdings have not had to bear the administrative burden of completing tax returns to declare small amounts of dividend income.
From 6th April 2023, this £2,000 allowance was reduced to £1,000 and it has since halved again from 6th April 2024 to £500. It is important that taxpayers are aware of this change because HMRC will not write to inform them that they need to start completing returns. The onus is on the taxpayer to recognise that their dividend income exceeds the allowance and make preparations to file a return and declare the income.
Capital Gains Tax Annual Exemption
The annual exemption for individuals was reduced from £12,300 to £6,000 from April 2023, with a further reduction to £3,000 taking effect from 6 April 2024. The annual exemption is broadly the amount of capital gains an individual can have before they start paying capital gains tax (CGT). If an individual’s net gains are below the annual exemption, no CGT is payable. If they are above the annual exemption, gains in excess of that will be subject to CGT.
The reduced annual exemption for 2023/24 and 2024/25 means that more taxpayers may be required to pay CGT on smaller disposals than in previous years.
If you would like more information on whether you may have tax to pay on your interest or dividend income, or if you may have a capital gain to declare, or may need to register for Self-Assessment, please speak to our Tax Director, Jenny Marks.
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