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Zopa warns savers on Personal Savings Allowance

  • 5 million savers could be in for a nasty tax bill if they exceed allowance
  • Savings accumulated over time will be taxable if they exceed allowance – while money saved in an ISA retains its tax-free status for life

Savers in the higher and additional rate tax bands – approximately 5 million people – or people with a significant amount of savings, are at risk of losing out if they continue to rely on the Personal Savings Allowance.

Introduced in 2016, the Personal Savings Allowance allows basic rate taxpayers to earn £1,000 of savings interest a year without having to pay tax on it. However, higher rate tax payers (people who pay tax at the 40% rate, income between £45,000 and £150,000) have a lower personal savings allowance of £500 per year, making it much more likely that they’ll exceed their allowance and end up paying tax on their savings.

With that in mind and with just 6 weeks to go until the end of the tax year, Zopa has calculated that if a higher rate taxpayer saves £20,000 in an easy access savings account each year at a rate of 1.5% per year for five years, they would quickly exceed their allowance and end up paying tax on their earnings – something they could avoid if they choose to put their money in an ISA instead.

In fact, the person would exceed their £500 personal savings allowance and start paying tax on their earnings after just 20 months of saving (approx. £33,000). At the end of the five-year period they would have accumulated £4,580 in interest but lost £912 as a result of exceeding their savings allowance, earning just £3,668 in interest after tax. (see table below)

Even if they stopped putting additional money into their savings account after two years, they would continue to pay tax on that amount. And savers can’t carry the Personal Savings Allowance forward or backward into other years, which means interest they’re earning in 2019 will be taxable into the future as their wealth accumulates.

In contrast, the same taxpayer putting the same £20,000 per year over a five-year period into an Innovative Finance ISA – such as Zopa’s ISA Plus product at 5.2% per annum – would net £16,725 in interest. Even a Cash ISA at 1.5% would yield £923 more in interest than a savings account that didn’t have a tax-free ISA wrapper, over the same period.

In recent years the popularity of the Cash ISA has waned, largely due to the poor returns, but also as a result of the introduction of the Personal Savings Allowance which has made the Cash ISA irrelevant for many people.

Andrew Lawson, Zopa’s Chief Product Officer, commented: “Savers relying on the Personal Savings Allowance need to keep a close eye on their money or they could be in for a nasty tax bill. 

“Traditionally banks haven’t helped their customers to make the most of their money, relying on consumer apathy to make profits.  This is another example of where savers need to beware themselves that they could really lose out if they use the PSA instead of the ISA.  Fortunately, there are plenty of alternatives out there. Zopa’s IFISA has higher returns than Cash ISAs and is covered by a tax-free wrapper, taking away any concerns people might have about breaching the PSA and giving investors protection against any future tax bills.”

Calculations –