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Michael Brown

Acting Editor
Published: 07/02/2023
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With interest rates rising, could you face an unexpected tax bill this year?

Last week the Bank of England (BoE) increased interest rates to a fresh 14-year high. While the news will excite savers, some will need to consider if this rise will come with a new tax bill from HMRC.

This is because the increase could affect your Personal Savings Allowance, a rule which has laid dormant for many savers before the Bank of England began increasing interest rates.

In essence, this allows basic-rate taxpayers to earn up to £1,000 in interest per year tax-free. Higher-rate taxpayers can earn up to £500 a year from their savings tax-free while additional rate taxpayers aren’t given an allowance.

If these allowances are exceeded, the excess on these earnings will be treated like income. Basic rate taxpayers will pay 20% tax while higher rate taxpayers will pay 40% on the interest that exceeds this threshold.

To explain how this works, consider this example.

John earns £1,500 for the tax year from interest on his savings accounts. As a basic rate taxpayer, he’ll be required to pay tax on £500 of this amount, while as a higher rate taxpayer he’ll need to pay tax on £1,000 of this sum.

Therefore, if he were a basic-rate taxpayer, he would need to pay £100 in income tax while if he were an additional-rate taxpayer he would be required to pay £400 in taxes.

Why is the personal savings allowance important this tax year?

At the Personal Savings Allowance’s inception in 2016, the UK operated in a low-interest rate environment.

This meant this rule only affected the more affluent savers, something which began to change in December 2021 as the BoE began increasing interest rates. As the base rate began to rise, so did the return on savings accounts.

In January last year, the typical easy access account paid 0.20%, according to Moneyfacts data.

It meant that such an account would need to hold £500,000 to breach the basic rate personal allowance. Today the average easy access deal stands at 1.73%, meaning it would only take £58,000 to surpass the same allowance.

This is why Rachel Springall, Finance Expert at Moneyfacts, encourages savers who may be close to breaching their Personal Savings Allowance to track variable rate changes on their savings regularly.

As for fixed rate bonds, there are several key considerations you may need to consider before choosing your best option.

What income counts towards my Personal Savings Allowance?

The Personal Savings Allowance doesn’t only apply to interest earned through savings accounts. It also includes the interest earned through lifetime annuity payments, Government or corporate bonds, and unit trusts, to name a few.

Fixed rate bonds and interest payments

If you’re looking at taking out a fixed rate bond this year it might be worth considering when your interest is paid. This can affect your Personal Savings Allowance in years to come, especially given that the rate will be fixed.

For example, Close Brothers Savings currently offers a rate of 4.45% which is paid yearly. If you were to make a deposit of £20,000 into this account you would earn £890 in interest each year over the five-year period. This is because the interest isn’t compounded, but rather paid away and will therefore be enough to breach the higher rate taxpayer threshold but not the basic rate taxpayer threshold.

This differs to UBL UK’s five year fixed offer, which can pay its interest of 4.25% on maturity. In this example the same £20,000 investment would earn £4,626.93 in interest at the maturity date. As a basic income taxpayer, £3,626.93 would be liable for tax at maturity.

The main benefit from this is that it won’t contribute towards your Personal Savings Allowance for the first four years, meaning it can be used by your other savings accounts paying interest during this time.  

It is important to remember that these examples are just given as illustrative purposes. The Personal Savings Allowance rules could easily change over the next five years, which could affect your savings differently.

How to pay the tax on my savings

Tax owed on your savings accounts is automatically deducted by HMRC if you are employed or receive a pension. Other savers, and those who earn more than £10,000 a year through interest, will need to complete a Self-Assessment tax return.

If you believe you’re eligible for a refund, you can file an R40 form on the Government’s website. Click here to get started.

Will your tax status change next year?

One change which could affect the Personal Savings Allowance for the next tax year is the change to the income tax brackets.

In Chancellor Jeremy Hunt’s Autumn Budget, those earning £125,145 a year will be classed as Additional Rate taxpayers from the beginning of April. Currently, this only includes those earning £150,000 a year.

Besides having to pay greater income tax, it also means those who were earning between £125,145 and £150,000 will now lose their Personal Savings Allowance altogether.

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What are my alternatives?

“Rising interest rates could result in consumers with larger pots breaching their individual allowance, which is why ISAs offer considerably more suitable longer-term tax-free benefits,” noted Springall.

She also was keen to point out that Cash ISAs have enjoyed notable rate rises over the past year, which could help boost their appeal.

Last February the top easy access ISA offered 0.26%, which is less than a seventh of the market-leading 1.85% offered today. As for fixed rate bonds, the top one year fixed ISA was set at 1.40% last February but now stands at 3.68%.

She was also keen to indicate that savers could consider other types of ISAs too. These could include stocks & shares ISAs and Lifetime ISAs, to name a few.

If you have used up your ISA allowance, another opportunity could be the National Savings and Investments’ Premium Bonds, which recently enjoyed a rate increase.

Instead of paying a guaranteed rate, those who invest in this fund stand a chance of winning a range of prizes between £25 and £1 million.

The odds of you winning a prize stands at 24,000 to one, which means you'll need to consider the risk of this investment carefully. Ultimately, it may be worth earning a guaranteed rate on another savings account and paying your due tax for breaching your Personal Savings Allowance.

The same argument can be made if you’re thinking of switching from savings to equities to avoid a tax bill from your savings. While equities are exempt from your personal savings allowance, this investment could incur Capital Gains Tax charges if owned outside an ISA. 

Currently, this allowance stands at £12,300 and is reduced to £6,150 for trusts.

Given that the stock market can be volatile, and is best utilised for long-term investments, you’ll need to consider if this is the best option for your financial goals.

If you would like to investigate the best option for your finances in more detail, speak to our preferred financial advisers Kellands Hale. Those with a minimum of £100,000 in savings and investments can receive a one-hour free consultation, with our readers eligible for a 20% discount off any initial advice fee.


Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time. Links to third parties on this page are paid for by the third party. You can find out more about the individual products by visiting their site. will receive a small payment if you use their services after you click through to their site. All information is subject to change without notice. Please check all terms before making any decisions. This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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