Over 1.1m savers already hit by tax on savings

HMRC has been writing to taxpayers to tell them their savings will incur tax, which is an annual activity and is part of their mission to help people to pay the right amount of tax. It also warned that if taxpayers have not received a tax calculation letter by the end of last month, they should get in touch with HMRC ‘as soon as possible to avoid a penalty’.

Now the 2023-24 tax year is closed with self assessment finalised, HMRC has been able to review the full savings tax liability situation, and of course, it receives data from the banks and building societies detailing the amount of interest paid to their individual account holders.

The letters are likely to be going to tens of thousands of taxpayers. HMRC stressed: ‘It’s an individual’s responsibility to ensure they pay the correct tax, and they should let us know as soon as possible if they believe they haven’t. It is our duty to collect taxes to fund public services.’

The latest figures from HMRC show that a total of 1.17m taxpayers already have income tax liabilities on savings income for the 2022-23 year, the latest data available.

In addition, 505,000 basic rate taxpayers are already paying tax on their savings interest, having exceeded the £1,000 personal savings allowance (PSA). These more than half a million individuals would have faced tax charges for tax year 2022-23.

This rose to 344,000 for higher rate taxpayers who can only earn £500 interest tax free a year, a threshold which has remained frozen since it was first introduced in April 2016. This affects anyone earning over £50,270.

For top earners facing the additional rate of tax of 45%, there is a zero personal savings allowance, which means all saving interest is taxable.

HMRC calculates the number of savers affected by saving interest tax based on the Office for Budget Responsibility (OBR) economic and fiscal outlook figures for March 2024.

Had the personal saving allowance risen in line with inflation the £1,000 figure would now be £1,360, and higher rate PSA would be £681. With the government considering an overhaul of ISAs, there will be even more concern about future tax bills.

The tax exposure will only get worse as AJ Bell found that 2.07m people will face a tax bill on savings interest in the 2024-25 tax year, based on a FoI request.

There has been a stark change since 2021-22 when only 158,000 higher rate taxpayers paid income tax on liabilities, with this expected to rise nearly fourfold to 590,000 in the 2024-25 tax year when final tax calculations are made by HMRC.

Laura Suter, director of personal finance at AJ Bell, said: ‘A previous Freedom of Information request from AJ Bell found that more than two million people would end up paying tax on their cash savings in the 2023-24 tax year, up from around 650,000 just three years ago.

‘The number of basic rate taxpayers being hit with the tax will near 1 million people, up from just half a million in 2022-23.

‘The thorny issue is that lots of people won’t realise they owe tax until a brown letter lands on their doormat.

‘While those filling out a self assessment tax return will declare any savings interest, and subsequent tax due, those taxed under PAYE get any tax liability calculated by HMRC, based on information sent to them by banks and building societies.

‘Often this will then mean your tax code is adjusted and you repay the tax through your payslip each month – eating into your take-home pay.’

When the PSA was first announced by then chancellor George Osborne in March 2015, the £500 and £1,000 figures seemed generous, with interest rates extremely low. At the time, tax experts told Business & Accountancy Daily that ‘very few people will be affected by this as they simply won’t be earning enough interest. This will only affect the highest earners’.

But with high interest rates it is easy to quickly fall into the £500 interest trap with bank savings rates as high as 5%-6% since the Truss Budget in 2022 saw interest rates soar.

Source - Business & Accountancy Daily

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