Why having just 16,000 in savings could now plunge you into a tax tangle
Rising interest rates should be excellent news for savers.
Best-buy savings accounts which are already breaching 6 per cent could rise further still tomorrow as the Bank of England is expected to increase the base rate to 5.5 per cent in the 15th consecutive increase.
But millions of savers could be in for a nasty surprise. Now they are finally earning a decent amount of interest, the taxman is clawing back an ever-greater proportion of it in the form of income tax.
Interest earned on savings is treated as income and taxed at your marginal rate of income tax.
For basic rate taxpayers, the taxman takes 20 per cent, for higher rate its 40 per cent and additional rate 45 per cent.
Savers all have a personal savings allowance, which means they can earn 1,000 or 500 of interest tax-free, for basic and higher rate taxpayers, respectively. Additional rate taxpayers pay tax on all their interest.
Yet these allowances look increasingly miserly as interest rates shoot up. Savers who have diligently built even modest nest eggs are now getting stung.