Savers who are set to fall into the higher income tax bracket from next month when the new thresholds apply are being warned to revamp their savings to avoid as much of the tax shock as possible.
Defaqto analyst David Black
On alert: Defaqto analyst David Black
An additional 750,000 people will pay tax at the 40 per cent rate from April 6 when the higher rate will be imposed on a taxable income above £35,001 instead of £37,401.
Taxpaying savers generally receive interest on their deposits net of tax at the basic rate of 20 per cent.
This means that higher-rate taxpayers, including those paying the 50 per cent rate introduced in April 2010, as well as the 40 per cent rate, have a further tax liability on interest earned.
This usually has to be declared to Revenue & Customs on a self-assessment tax form.
David Black, analyst for banking at research company Defaqto Insight, says some savers may find it beneficial to close savings accounts before April 5 to collect any interest due.
‘If you know your tax bracket is due to change soon it is important to take stock now,’ he says.
‘This might mean closing existing accounts and also maximising your cash Isa allowance before the end of this tax year. But remember to take into account any penalties.’
Black adds that Isas – either cash or equity – are the best way for savers to ensure that their savings grow free of tax. The £5,100 tax-free cash Isa limit is set to rise to £5,340 for the 2011-12 tax year.
Savers close to retirement or who know their income will drop in the medium term may want to choose accounts that defer interest payments. With most bonds, interest can be rolled up and paid on maturity. This means you can receive the interest when you are in a lower tax bracket.
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By Kerry Davies
