Ahead of the imminent new tax year, it’s important to know how to take advantage of the higher cash interest rates currently available.
Cash interest rates are now at the highest they’ve been since 2008. However not all cash rates are created equally and there are important tax considerations to be aware of too.
Owning cash is certainly more appealing than it has been at any time in the last 15 years and there are some tactics that can be deployed to ensure you’re getting the most benefit from it.
The key questions to consider regarding your cash savings are:
- How much interest are you earning on your cash?
- How much tax are you paying on your cash?
- Is your cash sufficiently diversified across an appropriate number of banking institutions?
Why each of these matter
1. Interest on your cash
Interest rates have gone up nearly 4% since December 2021. Sadly, the same can’t be said for cash rates. This is because retail banks, knowing that most people can’t be bothered with the admin of moving banks, are not always very good at passing on the higher rates to their customers. To get the best rates you need to shop around or take advantage of Wren Sterling having done that for you.
2. Tax on your cash
Super low rates for the last decade have probably meant that some people have forgotten that interest on their savings is taxable. It is and the thresholds are actually quite low.
Income Tax Band
|Personal Savings Allowance|
It follows that a higher rate taxpayer earning 3.23% on their cash would “only” have to have £15,500 invested in cash before they started paying 40% on their interest!
An additional rate taxpayer pays 45% on all interest and there’s a definite risk these days of being dragged into a higher tax bracket by virtue of the interest on your cash.
To best manage this, on savings over the personal savings allowance, we would urge you to make best use of all of your other tax-free allowances which we can help the planning around. This may be as simple as ensuring you utilise all of your available ISA, Pension allowances for this tax year. Equally, it may be the case that you’ve used all of these and have no alternative but to pay the tax, in which case it would make sense to simply ensure you’re getting the best available rate, whilst still ensuring easy access.
3. Sufficient diversification of your cash
The memories of people queuing up to get their money out of banks in 2008 remain firmly etched in the mind. Whilst we don’t think the issues at Silicon Valley Bank will fall like dominoes on other banks (it had a very concentrated investor base and made some unfortunate investment decisions), we do think that it is a reminder of the prudence in spreading your cash across more than one Bank
The UK regulator guarantees compensation in the event of bank default up to the value of £85,000 per person, per banking institution.
Wren Sterling’s cash service spreads cash across 40 separate qualifying banks and our platform cash offering spreads cash across 3 separate qualifying banks. This gives protection over cash holdings of £3.4 million and £255,000 respectively.