Britons are at risk of falling into a “savings trap” and inadvertently paying more than they need to by not making use of a way to save tax-free .
As interest rates rise, and hence more interest could be earned, savers are at greater risk of breaching the personal savings allowance (PSA), which protects a proportion of peoples’ savings interest from income tax.
Basic-rate taxpayers have a PSA of £1,000, while higher-rate taxpayers have savings pots of up to £500 protected.
A poll of more than 1,700 savers carried out by Paragon Bank found that almost a third of respondents broke their PSA for the first time in 2023.
More Britons are paying more tax on their savings by accident
GETTY
The survey revealed that 37 percent of those polled earned enough interest on their savings to breach their personal savings allowance this year.
From this group, around 30 percent fell foul of the threshold for the first-time with savings interest rates easing closer to pre-pandemic levels.
Some 43 percent of those surveyed blamed soaring interest rates as to why they ended up exceeding their personal savings allowance.
Another 22 percent of individuals polled cited the increase of savings balances as to why this tax allowance was breached.
To avoid paying tax, some Britons have turned to transfer existing non-ISA savings into ISAs, with 40 percent of savers opening new cash ISAs.
Around 58 percent of those surveyed are maximising their annual £20,000 ISA allowance.
Another 67 percent of this group preferring to make a lump sum deposit at the start of the tax year, while 30 percent choosing for a year-end deposit.
Derek Sprawling, the savings director at Paragon Bank, outlined how ISAs are useful tools in securing people protect more of their money from interest.
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ISAs are useful tools for those looking to save more than the personal savings allowance threshold without having to pay tax
GETTY
He explained: “The Personal Savings Allowance has largely flown under the radar in recent years due to the low-interest rate environment, but rising rates have brought it back into focus.
“With three out of ten savers now paying tax on their savings interest, it's crucial to employ tax-efficient strategies, such as using ISAs, to protect your hard-earned savings and considering having interest ‘paid away’ on longer-term bonds.”
Mr Sprawling added: "Paragon Bank has long championed the tax-free benefits of ISAs, advocating for their use even in periods of low-interest rates.
"As savings rates continue to rise, ISAs remain an essential tool for savvy savers seeking to safeguard their financial well-being.”