The savings blunders that could cost you

Savers are battling with lower interest rates being paid on their savings due to the falling Bank of England base rate. At the same time, savings tax is also a worry for savers as many more will pay tax on their hard-earned savings this year compared with 2021-22.

Some 2.64million people will be stung by tax on the interest they earn in their savings accounts in 2025-26, according to HM Revenue & Customs. This is Money spoke to two savings experts to find out the savings mistakes that could catch savers out and cost them interest and how to make the most of savings rates while they can.

Many of the best savings accounts and Isas come with a short term bonus to boost the rate which disappears after 12 months. For example Cahoot’s simple saver paying 4.40 includes a 12-month bonus of 3.41 per cent. But if you don’t mark the date to switch your savings account, you will find you receive a rate of just 0.99 per cent. Andrew Hagger, founder of independent information website MoneyComms says: ‘Failure to switch lumbers you with a poor savings rate. For example the Tesco Bank internet saver pays 4.10 per cent but this includes a bonus of 3.05 per cent so in a years time your rate will drop to a measly 1.05 per cent.

Some savings accounts last for a specific length of time, including regular savers and fixed rate deals. When they expire, your money could be shifted automatically somewhere less rewarding. It means you can pay the price for forgetting about these accounts. For example Cynergy Bank’s one-year fixed-rate Isa pays 4.32 per cent on savings. But if you don’t move your funds when the term is over, your savings will be moved into a variable rate Isa with a rate of just 1 per cent. Providers bank on savers forgetting when their bonus or fixed-rate account matures. Sarah Coles, head of personal finance at stockbroker Hargreaves Lansdown says: ‘You can pay the price for forgetting about these accounts. If you save somewhere with a limited lifespan, set yourself a diary reminder to move.’

If your only source of income is your savings interest, you qualify for tax-free allowances. These are the personal allowance of £12,570 and the potential ability to use the £5,000 starting rate for savings. Low earners can use their personal allowance of £12,570 to earn interest tax-free if it has not been used up by earnings or other income, such as a pension. Those earning less than £12,570 receive an extra £5,000 tax-free allowance for their savings income. This means someone can earn £12,570 in income and £6,000 in savings interest (£5,000 starting savings allowance plus the personal savings allowance of £1,000) before tax is applied. Another way you could cut a tax bill is by transferring some of your personal allowance to your spouse if they earn less than you and below £12,570.

The best way to shield savings from tax is to funnel your money into an Individual Savings Account (Isa). These are much like any other type of cash savings account, except any interest earned is completely sheltered from tax. You can put up to £20,000 into Isas every tax year. Savers can bag a rate above 5 per cent on easy access Isas, while one-year fixes pay up to 4.3 per cent. Ms Coles says: ‘More people face tax on their savings, but there’s a risk they haven’t thought about it, so haven’t switched their money into a cash Isa , where interest is tax-free.’

Rising savings rates have pushed more people over the Personal Savings Allowance (PSA) threshold. Savers all have a PSA, giving them £1,000 or £500 of interest tax-free, for basic and higher rate taxpayers, respectively. However, that’s not all that’s at play, because frozen income tax thresholds mean pay rises are pushing more people into higher and additional rate tax bracket, where their savings allowance halves or disappears overnight (from £1,000 for basic rate taxpayers to £500 for higher rate taxpayers or to no allowance at all for additional rate taxpayers).

A basic rate taxpayer would breach their PSA with £19,600 in the top easy-access account, while a higher-rate taxpayer would breach it with £9,800 saved. This was £154,000 and £77,000 respectively in 2021. Coles says: ‘Even if you’re not facing a tax bill today, it’s worth considering what will happen as you build your savings. Some people will want to get ahead of a tax bill and make the switch to a cash Isa sooner rather than later.’

More than half of savers still keep at least some of their savings in a current account, according to Hargreaves Lansdown. While astaggering £526billion is estimated to be sitting idle in current accounts earning no interest. One in three people have £5,000 sitting in their current account, while the average current account balance is £2,067. These savers could be missing out on £20billion annually in interest by leaving money languishing in current accounts and not moving it to high-interest savings accounts, data from Paragon Bank shows.

Savers would stand to make £215 interest if they kept £5,000 in the best easy-access account paying 4.3 per cent. While the average current account balance of £2,067 would grow by £89 if kept in the best easy-access account. Mr Hagger says: ‘Keeping your savings in your bank current account is rarely a good idea, not only do you earn a pittance and in some cases no interest at all, you can also easily get your savings muddled, lose track of your savings balance too) and eat into it without realising.’