The surprise £5,000 tax bill thousands of savers face – and how to avoid it | Personal Finance | Finance

The only positive thing to have come out of the soaring living costs that have battered us all over the past four years has been the soaring interest rates on savings accounts. Savers have been rewarded with average peaks of 6% in some years, now dropping to around the 4% mark. But there is no rose without a thorn, and the thorn is set to slap hundreds of thousands of Brits with a new £5,000 tax bill.

What’s worrying is that many may not even be aware it’s coming. A Freedom of Information request by Paragon Bank showed the number of savers expected to pay £5,000 or more in income tax on their savings interest has risen to 144,000 this year.

This marks a staggering 173% increase in four years, nearly tripling since 2023, when 52,700 had the same tax liability. What’s worse is that there are currently 1.1 million easy access adult savings accounts holding balances of £100,000 or more, with a combined value of more than £260.7billion. Some of these balances could be generating hundreds, if not thousands, of pounds in tax, as they sit outside a tax-free wrapper.

The Government’s Personal Savings Allowance, which protects some savings interest from tax, has remained frozen since its introduction 10 years ago. Currently, basic-rate taxpayers can earn up to £1,000 in interest on savings accounts tax-free; higher-rate taxpayers, up to £500; and additional-rate taxpayers receive no allowance.

With interest rates higher than in recent years, more savers are being pushed over these limits and into paying tax on their nest eggs.

Check your savings accounts and find out how much interest you’re projected to earn this year. If it looks like you’re one of the ones set to be stung, consider moving your savings into an ISA (Individual Savings Account). Cash ISAs work like normal savings accounts, but you will not be taxed on the interest you earn. Stocks and Shares ISAs allow you to invest in a range of assets, including stocks, bonds, and funds, with any gains being tax-free.

This tax year, you can save up to £20,000 across all ISA types without paying tax on interest earned, making the move a no-brainer if you’re set to be affected.

At the time of writing, fixed-rate ISAs offer up to 4.66% AER (Aldermore Bank), while easy access accounts offer up to 4.44% AER (Plum). For a list of the top rates, visit moneyfactscompare.co.uk and filter deals to match your preferences.

Sign up to Odeon Extras for free and bag cinema tickets for as little as £5 on Mondays. The discount is applied to the ‘Saver’ ticket option, and the amount of discount will vary between cinemas and whether you purchase your tickets online or in person.

Aldi has once again been crowned the cheapest UK supermarket, saving customers a whopping £66 on a basket of 95 items when compared to the most expensive players on the high street in June. It goes without saying that the most expensive shop was Waitrose.

Every month, consumer champions at Which? run a price comparison based on the same basket of branded and own-branded goods, including milk, cheese and bread. Aldi shoppers paid an average of £163.34 for the basket, just 13p less than Lidl’s £164.92.

Asda followed, costing shoppers £190.39 for the list of 95 items. Sainsbury’s with Nectar came next at £193.30, followed by Tesco with a Clubcard at £194.67 and then Morrisons with a More card at £198.41. Waitrose was again the most expensive supermarket in the monthly analysis, with the same items costing £229.88 on average throughout June.

The analysis also revealed the difference that having a supermarket loyalty could make. According to Which?, a loyalty card saved shoppers an average of 2.97% at Tesco and 5.17% at Sainsbury’s over the month. So, if you don’t have one already, it’ll certainly pay to get one. You can apply for a Tesco Clubcard or Sainsbury’s Nectar Card by downloading the app to your mobile phone or visiting the respective websites.

Other loyalty schemes available include Morrisons More, Lidl Plus, Asda Rewards, Co-operative Membership, MyWaitrose, M&S Sparks, and Iceland Bonus Card. Each comes with its own freebies and points systems, and will ultimately save you a bit of cash.