Savers are set to be hit with a ‘double whammy’ as HMRC is tipped to rake in an extra £9billion in savings interest.
Britons have been hit with a double whammy of fiscal drag and higher interest rates which have led to a rise in the number of people paying tax on savings income.
HMRC is set to rake in £10.4billion from savers, a £9billion increase from the pandemic.
In 2020/2021, savers paid only £1.4billion in tax on savings interest to the Government body.
In response to the Income Tax liability statistics released by HMRC on Thursday, Jeremy Cox, Head of Strategy at Coventry Building Society, said: “Millions of people are already paying tax on their hard-earned savings, with more and more quietly slipping into the stealth savings tax trap every year.
“A double whammy of fiscal drag and higher interest rates has led to a surge in the number of people paying tax on savings income and the amounts they’re having to cough up.
“Savers are typically earning higher interest rates on their savings pots than they were a few years ago. And, while tax-free cash ISAs have surged in popularity, those with money in non-ISA savings are using up their Personal Savings Allowances more quickly.”
Savers are typically earning higher interest rates on their savings pots than they were a few years ago
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The Personal Savings Allowance (PSA) is a tax-free allowance that lets people earn interest on their savings without paying tax on that interest.
The allowance people get depends on what rate of income tax they pay:
- Basic-rate (20 per cent) taxpayers: can earn £1,000 in savings interest per year with no tax
- Higher-rate (40 per cent) taxpayers: can earn £500 in savings interest per year with no tax
- Additional-rate (45 per cent) taxpayers: £0 – they do not get an allowance.
The PSA is to be slashed for 2.1 million people this year.
Cox explained that 5.7 million people will be pushed into paying a higher rate of income tax this year, and 2.1 million more people are set to see their PSA slashed in half to £500 as they enter the higher rate tax band.
He said: “With the Bank of England base rate held at 5.25 per cent, its highest level in 15 years, savings rates across the market are competitive. Unlike in previous years of ultra-low interest rates, many taxpayers with modest savings today might not even realise they could be taxed on the interest they earn.
“Unless they have shielded their savings from tax using an ISA, a higher rate taxpayer with a savings account paying 5.25 per cent would only need a balance of £9,525 to see their savings interest hit £500, eating up all of their Personal Savings Allowance. They would have to pay the taxman 40 per cent of any further interest they received.
“The sums are a bit more forgiving for Basic rate taxpayers, who with a similar interest rate would use up their £1,000 Personal Savings Allowance with just £19,050 in their account. Any more interest earned would be taxed at 20 per cent.
“The antidote to paying tax on savings is the cash ISA. You can save anything from £1 up to £20,000 each tax year and you won’t pay a penny of tax on the interest earned.”
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AJ Bell investment platform is calling on the Chancellor to end the freeze on the personal savings allowance, which has been set at the same level since 2016.
Alongside recent rate rises, the freeze means even those with prudent rainy-day savings are being hit with tax penalties. With cash interest rates now above five per cent on some accounts individuals with as little as £10,000-£20,000 in cash can expect to be impacted.
AJ Bell believes nobody should be punished for holding a rainy-day savings pot and doubling the personal savings allowance would ensure households aren’t taxed on cash savings up to £20,000.
Laura Suter, personal finance expert at AJ Bell said: “Nobody should be punished for holding a rainy day savings pot, and doubling the personal savings allowance would ensure households aren’t taxed on cash savings up to £20,000, based on current rates.”