In a recent survey conducted by Shawbrook, it has been uncovered that a considerable number of Britons are uncertain about their tax obligations on savings returns. The study has revealed that many individuals are unaware of the circumstances under which they should pay tax on interest or returns earned from savings held outside of an ISA.
The survey has indicated that one in ten people mistakenly believe that they are not required to pay tax on their savings returns if they are held outside of an ISA. Furthermore, nearly three in ten individuals confessed to being unsure of whether or when they should pay tax on the interest earned from their savings.
The confusion surrounding tax obligations on savings returns is further compounded by the fact that almost two in five active savers overestimate the personal savings allowance (PSA). The PSA, which has remained unchanged at £1,000 since 2016, permits individuals to earn a certain amount of interest on their savings without incurring tax. Nevertheless, the survey has demonstrated that, on average, active savers estimate that they can save almost three times the actual limit at £2,649 before being liable for tax.
Additionally, the research has highlighted that a significant number of savers do not fully comprehend the process of declaring interest earned for tax purposes. More than a quarter of the survey participants mistakenly believe that they are never required to complete a tax self-assessment for interest, despite HMRC’s requirement for those earning over £10,000 in interest to do so.
The survey has also shed light on the underutilisation of ISAs as a tax-efficient savings option. Despite the generous annual allowance of £20,000 to save in an ISA, over half of active savers were not taking advantage of the tax protection it provides. Some individuals cited concerns about having their savings tied up, while others believed that they did not save enough to be affected by tax.
Adam Thrower, Head of Savings at Shawbrook, has underscored the significance of comprehending tax thresholds and maximising allowances to facilitate the growth of savings in a tax-efficient manner. He has recommended ISAs as the primary means for savers to achieve this, noting that the leading ISAs presently offer competitive rates and the opportunity to safeguard savings from tax.
In view of the findings, it is imperative for individuals to acquaint themselves with their tax obligations regarding savings returns. With the PSA frozen and elevated interest rates, the amount required to breach the tax threshold is much lower than it used to be. It is essential for savers to stay informed about the rules and regulations concerning tax on their savings, in order to avoid being caught out and to ensure the growth of their savings in a tax-efficient manner.