MILLIONS of savers face paying unnecessary tax on their hard-earned money by relying on the personal savings allowance (PSA), Zopa has warned.
Introduced in 2016, the PSA lets basic-rate taxpayers earn £1,000 of savings interest a year tax-free, but it is just £500 for higher rate taxpayers, which the peer-to-peer lending giant warns could be easily exceeded.
The P2P platform said around five million savers are currently in the higher- and additional-tax bands.
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Its analysis found that if a higher rate taxpayer saves £20,000 in a standard easy access savings account each year at a rate of 1.5 per cent for five years, they would exceed their £500 personal savings allowance and start paying tax on their earnings after just 20 months of saving.
At the end of the five-year period they would have accumulated £4,580 in interest but lost £912 as a result of exceeding their savings allowance, earning just £3,668 in interest after tax.
By contrast, the same taxpayer putting the same £20,000 per year over a five-year period into an Innovative Finance ISA – such as Zopa’s ISA Plus product at 5.2 per cent per year – would net £16,725 in interest over five years.
This assumes that the Zopa rate stays the same over that period as it could go up or down.
Even a cash ISA at 1.5 per cent would yield £923 more in interest than a savings account that didn’t have a tax-free ISA wrapper over the same period, Zopa said.
“Savers relying on the PSA need to keep a close eye on their money or they could be in for a nasty tax bill,” Andrew Lawson (pictured), chief product officer at Zopa, said.
“Traditionally banks haven’t helped their customers to make the most of their money, relying on consumer apathy to make profits.
“This is another example of where savers need to beware themselves that they could really lose out if they use the PSA instead of the ISA.”