Tax on savers set to rocket as 2.7m exposed

Rising interest rates and frozen tax thresholds will push over one million taxpayers into paying tax on their savings this tax year

In the 2023-24 tax year it is estimated that over 2.7 million individuals will pay tax on cash interest, up by a million in a single year, revealed analysis of HMRC figures by investment platform AJ Bell. In 2020-21 only 800,000 people paid tax on savings.

This year’s predicted total includes nearly 1.4m basic rate taxpayers, a figure which has quadrupled in just four years.

The figures underline the case for increasing the threshold for taxing savings income. AJ Bell estimated that around one in 20 basic rate payers will be paying tax on cash interest, rising to one in six higher rate payers and around half of additional rate payers.

Individuals pay tax on interest they earn on cash savings that exceeds the personal savings allowance, which currently stands at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers get no exemption and pay tax on all cash interest they receive.

In total, taxpayers are expected to hand £6.6bn to the Treasury this year from tax on the interest they earn.

AJ Bell is calling on the Chancellor to end the freeze on the personal savings allowance, which has been set at the same level since 2016.

Doubling the personal savings allowance would ensure households are not taxed on cash savings up to £20,000, with the top easy access account now paying 5%. Although, with some savings accounts offering 6%, a basic rate taxpayer could hit the personal savings allowance with around £16,700 in savings, or £8,400 for a higher rate taxpayer.

AJ Bell head of personal finance, Laura Suter, said: ‘These figures highlight just how many taxpayers are facing a tax bill for their savings interest this year – a huge leap when compared to last year. The combination of higher interest rates and people having shunned ISA accounts in recent years means that the number paying tax on their savings has more than tripled in the past four years.

‘Rising rates and a frozen Personal Savings Allowance means some individuals are being taxed despite having relatively modest pots of cash set aside for a rainy day. To add insult to injury, because inflation is so high, they aren’t even making a real return on their money – yet they are still being taxed.

‘The tax threshold is also contradictory to government policy in other areas. Interest rates have risen, in part to encourage people to save money rather than spend it and reduce demand in the economy to bring down inflation. So it doesn’t make much sense to tax people at the same time.’

Tax bills are paid either through self assessment, or deducted from income through a tax code adjustment. Many will not be aware that they owe the tax until HMRC sends them a letter informing them about a change to their tax code which means the money will be deducted through PAYE earnings.

‘Until a brown letter lands on their doormat some people won’t even realise they owe tax on cash interest’ warned Suter. ‘Those filling out a self assessment tax return will declare any savings interest, and subsequent tax due.’

‘For those taxed under PAYE, HMRC will calculate any tax due based on information sent to them by banks and building societies. It means many taxpayers will find there is a deduction made from their payslip each month, often before they’ve even realised they owe any money to the taxman.’

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