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Half of taxpayers facing HMRC interest bills are pensioners, it has been warned. HMRC expects 1,160,000 people over state pension age to incur an income tax liability on savings this year, AJ Bell has found. It means pensioners account for almost half (44 per cent) of all taxpayers facing an HMRC bill. Charlene Young, senior pensions and savings expert at AJ Bell, said: “Many people may not realise how tax applies on the income earned from savings accounts. “Income tax applies to earnings and pension income first, before savings income and dividends at your marginal rate. This means the government could come calling for 20p, 40p or even 45p from every pound of interest your bank pays out, depending on your other income. READ MORE Thousands of Blue Badge holders issued update over free bus travel “Most people have a personal savings allowance — £500 or £1,000 for higher and basic rate taxpayers respectively — which offers some protection from the taxman’s clutches. "Likewise, Isas and pensions are the perfect way to shield your savings and investments and maximise your returns.” Ms Young said: "You’ll pay income tax on withdrawals above your tax-free cash allowance and, once it’s outside a pension, you may be subject to capital gains or dividend tax if you invest it elsewhere." “If you park the money in cash you may find yourself with an added income tax bill — joining more than 1 million pensioners with a tax liability on cash savings,” she said. “You don’t have to hold the money in the bank. Your provider may offer a relatively attractive rate of interest on cash held in a pension, or you could hold investment products that are comparable to cash, such as money market funds," she added. “Some savers have been paying into regular savings accounts chasing a fractionally higher return in recent years, but that may have backfired for those who find the tax bill now outweighs any additional interest earned and regret not paying into an Isa sooner,” she said. “Other options include splitting cash savings accounts efficiently between a married couple. "You could give your spouse cash savings to use up their tax-free personal savings allowance. "That’s especially helpful if you’re a higher or additional rate taxpayer and your partner is a basic rate taxpayer, meaning they benefit from the full £1,000 allowance.”
