Millions of savers could face an unexpected tax bill as the Personal Savings Allowance (PSA) marks its 10-year anniversary on Monday, according to a report.
Basic rate taxpayers have paid over £4.7m in tax on their savings interest, much of which could have been avoided by using ISA wrappers, according to the report from Moneyfacts.
According to the report, savers receiving interest from the top one-year bond a year ago that paid 4.58% on a £20,000 deposit would have earned £916, breaching the £500 PSA for higher-rate taxpayers, and very close to the £1,000 PSA for basic-rate taxpayers.
A £20,000 investment in the top one-year ISA that paid 4.45% would have earned £890, completely tax-free.
Over a third (36%) of savers have never heard of the PSA, according to a separate survey conducted by Yorkshire Building Society.
The Personal Savings Allowance (PSA) allows UK taxpayers earn up to £1,000 in savings interest tax-free.
Basic rate taxpayers can earn up to £1,000 interest tax free, whilst higher-rate taxpayers can earn up to £500 in interest tax-free. Additional-rate taxpayers do not receive a PSA.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “April marks the 10-year anniversary of the PSA, and while it protected savings interest from tax when it was launched for many, it’s outdated and needs to change.
“Interest rates are higher than back then, and more savers are expected to see their savings income taxed in the years ahead due to fiscal drag. Those basic-rate taxpayers dragged into the higher-rate tax band at 40% will see their PSA halved, to £500.”