Savings rates to drop by 20% in April?

9 March 2011

£100 won't even get you a whole £2 coin in interest

As anyone on a fixed income will tell you, with the Bank of England base rate so low, it ain’t a fun time to be reliant on savings interest or annuity rates. And for those in a certain income bracket, it’s only going to get worse in April.

You see, on 6 April 2011 the personal allowance for those earning under £100,000 goes up to £7,435, but as a consequence and by way of trade off, the limit at which higher rate tax kicks in drops to £35,000, which will bring an estimated extra 750,000 taxpayers into higher rate tax, according to the Institute of Fiscal Studies.

The issue with savings interest is that such income currently suffers deduction of basic rate (20%) tax at source, i.e. the bank whips 20% off your bank interest before you can even think about spending it. However, if you are now a higher rate taxpayer, you will still owe a further 20% tax on that interest which may mean, heaven forbid, you now need to complete a Self Assessment tax return and deal with all the hassles that brings.

It also means that shopping for the best rate available becomes a little more complicated. According to Moneyfacts Best Buys, you will struggle to find a rate, even on a notice account, above 3% pa – take 40% off that and you get a net return of just 1.8%. Shocking.

So what can you do? Well, aside from finding an ingenious way to reduce your income below the new higher rate band level, if you want to save your pennies in the bank, look at the tax-free options like ISAs, provided you haven’t used your £10,200 overall limit (£5,100 for cash) or, if your income may fall in future years, consider investing in longer term bonds or certificates, where the interest will become payable in future years when you may have regained your basic rate taxpayer status.

Or you could be happy that you earn so much and shut up about it...

TOPICS:   Tax   Banking

7 comments

  • Robin
    I think the personal allowance is £10,200, of which a maximum of £5,100 can be cash.
  • Sam T.
    Robin you are of course correct. It has been that long since I had enough cash to put in one...
  • Alan
    The personal allowances for ISA's are now set tgo up each and every year - so from April this year they are £10,680 - of which cash limit is £5340
  • mein c.
    "Or you could be happy that you earn so much and shut up about it…" Nail -> head.
  • Alexis
    For the rest of us, we don't have to pay 20% on an additional grand, pocketing £200 that would normally go to slipper face. It's the first decent thing they've done. Just a pity nobody will be in a job to take advantage.
  • Simon
    Rates above 3% are prolific now anyway, particularly if you're sheltering your cash in an ISA. And if you're earning £35k+ chances are a woman has leeched on to you. Chances are, because she's a woman, she's earning less. Chances are, because your wife's a whore she's had kids and won't work for the rest of her life. Chances are, because she doesn't work you've realised she's eligible for gross interest and you've put your money away in her name anyway. Good ol' tax evasion.
  • Jenniferruthbis
    However, if you are now a higher rate taxpayer, you will still owe a further 20% tax on that interest which may mean, heaven forbid, you now need to complete a Self Assessment tax return and deal with all the hassles that brings. ___________________ Jennifer Top Savings Accounts

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