The upcoming changes to ISAs are set to make those under 65 rethink their saving strategies.
However, there is already an ongoing issue with savers not understanding their Personal Savings Allowance and facing an unexpected tax bill.
Ahead of the restrictions on ISAs, it is important for savers to understand when interest gets taxed and how to manage disclosure.
Why do savers get caught out by unexpected tax?
For those savers who are paid and taxed through PAYE, the notion of having to manage their own tax bill might seem an uncomfortable challenge.
There is often a fear of getting things wrong or a simple lack of awareness that anything needs to be done beyond what is handled by PAYE.
This results in the interest generated from savings accounts exceeding your Personal Savings Allowance and a tax bill landing unexpectedly on the doorstep.
Depending on the rate at which you pay Income Tax, your Personal Savings Allowance will differ.
The thresholds are:
- £1,000 for Basic-rate taxpayers
- £500 for Higher-rate taxpayers
- £0 for Additional-rate taxpayers
Generally, those who file a Self Assessment tax return are less surprised by the Personal Savings Allowance, as interest is declared as standard when filing these returns.
How will the changes to ISAs make the savings tax trap worse?
The proposed reduction in the annual saving limit for Cash ISAs from £20,000 to £12,000 for those under 65 will cause many to rethink their saving strategies.
Interest generated through an ISA is typically tax-free, so there is a risk that savers may adopt other saving strategies under the false belief that they are similarly tax-efficient.
While loading up a Cash ISA to reach the annual limit as close to the start of the tax year as possible is a good strategy, mirroring that with other accounts may result in a steep tax bill when interest starts accumulating.
The best approach now is for savers to get in contact with a financial expert to understand their tax position and determine an efficient saving strategy.
Our team can support those looking to grow their wealth to do so effectively, even as Cash ISAs become less impactful.
Speak to our team to ensure that your saving strategy is tax-efficient.
