With high inflation raging on, some economists are predicting another interest rate rise for the UK on May 11th . The Bank of England is using interest rate hikes as an attempt to control inflation, aiming to get inflation back to a target of 2% from the 10.1% reported in March 2023. A high interest rate environment can be damaging for mortgage holders, but gives opportunity for savers to yield an interest on their cash whilst guaranteeing Financial Services Compensation Scheme (FSCS) protection up to £85,000 as an individual account holder.
Given the rise in interest rates now is a good time to consider where you house your savings, and associated tax planning you should be aware of.
Below is a list of the highest yielding savings accounts for UK investors:
Chip Easy Access – 3.55% per annum
Family Building Society Easy Access – 3.40% per annum
Oaknorth Bank 1 Year Fixed – 4.57% per annum
Al Rayan Bank 18 Month Fixed – 4.57% per annum
Smart Save Bank 2 Year Fixed – 4.61% per annum
The interest yielded from any personal savings will be taxable under income tax legislation. For basic
rate tax payers there is a £1,000 personal savings allowance, £500 for higher rate and £0 for additional rate. If interest pushes you into the next tax bracket your rights to the allowance will reduce. Interest for all savings accounts is paid gross, and is then taxable on self-assessment. Households with earners in different tax brackets should therefore consider whose name savings are in thanks to the risk of taxation.
An alternative option to traditional savings as per the above is Premium Bonds. Premium bonds offer tax free interest by way of prizes, ranging between £25 and £1,000,000. The average interest rate for premium bonds is 3.3% per annum. Premium bonds are capped at £50,000 per person; however interest is completely tax free. Assuming a basic rate tax payer has £50,000 in premium bonds their 3.3% would yield them £1,650 tax free. Comparing this to £50,000 in a savings account at 3.55% easy access, they would get £1,620 in interest after tax. A higher rate tax payer would yield £1,265 after tax. Premium bonds are therefore a really good easy access savings option for higher rate tax payers specifically, thanks to their tax free nature. At present a higher rate tax payer would need to yield 4.85% per annum to beat a 3.3% prize equivalent interest rate on a premium bond.
ISAs are another good way to remove the risk of interest being taxed. In 2023/24 you can save a maximum of £20,000 into an ISA, which can be cash, stocks & shares or innovative finance focused.You can split the £20,000 across multiple strategies, but cannot breach this limit per tax year. Note you can transfer legacy ISAs into new ISAs without this impacting the current year’s allowance.
Below are the highest yielding Cash ISAs available on the market a date of writing:
Cynergy Bank Easy Access – 3.28% per annum
Gatehouse Bank 1 Year Fixed Rate – 4.2% per annum
Close Brothers Savings 2 Year Fixed Rate – 4.28% per annum
If you were comfortable tying up £20,000 with Gatehouse yielding 4.2%, as a basic rate tax payer you’d be saving £168 in tax and higher rate £336 (assuming no savings allowance is available).
Written by: Catriona McCarron
Date: 20th April 2023