Couples with joint savings accounts are warned they could face unexpected tax bills. Financial experts have highlighted the risk for those with joint accounts generating £1,000 or more in interest, advising them to make sure they’re making the most of their individual tax allowances.

What does this HMRC tax warning mean in simple terms?

The allowances available for earning interest on savings before being taxed include:

• Your Personal Allowance
• Starting Rate for Savings
• Personal Savings Allowance

These allowances are adjusted annually and depend on your total income from other sources. How much interest you can earn tax-free varies based on factors such as your salary, pension, or other taxable earnings. If you aren’t sure on your allowances, be sure to check this guide from HMRC. 

Savings interest in a joint account is divided equally between both account holders by HMRC, regardless of who contributed more. This means if one partner is in a higher tax bracket, they could end up paying significantly more tax on their share of the interest compared to the other.

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What are the recommendations to avoid this?

Laura Sutler, from AJ Bell recommends two options to maximising tax-free earnings from bank interest. One option is to transfer savings to the partner who is either in a lower tax bracket or who hasn’t fully used their Personal Savings Allowance which could help maximise tax-free earnings.

The other recommended option is using tax-efficient accounts like a stocks and shares ISA or an Innovative Finance ISA which allows investment to grow without taxes. The Personal Savings Allowance allows basic-rate taxpayers to earn up to £1,000 in interest tax-free, while higher-rate taxpayers can earn up to £500 before being taxed.