HMRC is expected to collect more than £10 billion in savings tax this year, new figures show.
This represents a staggering £9 billion increase compared to 2020, according to the government’s latest income tax report.
This comes after two years of record high interest rates on savings and frozen tax relief thresholds.
AJ Bell’s Laura Suter commented: “The government is a big winner in rising savings rates. While savers have been enjoying higher rates, the taxpayer is putting his hand in his back pocket and collecting a piece of the spoils.”
Ms Suter, who is director of personal finance at the investment platform, continued: “The amount the nation pays in tax on its savings has increased tenfold over the past four years and this year the nation is expected to hand over £10bn of its interest savings on taxes.
“The latest figures show the government is expected to levy £10.4 billion on savings interest tax in the current tax year – compared to the £1.4 billion it claimed in 2021/22.”
Estimates for last year were also significantly revised. Ms Suter noted that although the nation was originally expected to pay a combined £6.6bn in savings interest tax in 2023/24, the actual tax for that year rose to £9.1bn. This represents an increase of almost 40 percent more than expected.
Suter said: “If we see a similar increase between predicted and actual taxation for this year, it could mean the nation paying £14 billion in tax on its savings.
According to Suter, part of the increase in the national savings tax bill is due to insufficient use of ISAs to protect cash from tax in a period of rising interest rates.
She explained: “It means that while they have benefited from higher savings rates, they are breaching the tax-free personal savings allowance and paying tax on some of the interest.”
In addition, Ms Suter said: “Much of this rise in tax bills is also because the frozen tax bands mean more people are pushed into higher tax bands, meaning their personal savings allowance is halved or lost altogether, if they find themselves in the tax band of additional rates.’
Under the Personal Savings Allowance (PSA), basic-rate taxpayers can earn £1,000 in pre-tax interest on savings, while higher-rate taxpayers get a £500 discount.
Suter said: “In some cases, the interest that people receive pushes them into a higher tax bracket themselves – meaning they pay tax at a higher rate and on more of their money.”
This is reflected in the amount of tax paid by additional taxpayers, according to the report.
Suter said: “The threshold for the 45 per cent tax rate was reduced from £150,000 to £125,150 last year. While basic-rate taxpayers get £1,000 of savings interest tax-free and higher-rate taxpayers get £500, additional-rate taxpayers are taxed at 45 per cent on all their savings.
“In the current year, the tax on savings paid by additional rate taxpayers is set to rise to £8.3bn – surprisingly not far from the total tax on savings from all taxpayers last year.
“However, no one is spared from the tax raids as basic and higher rate taxpayers will also pay more tax on their savings.”
Because of the way savings tax is calculated, Ms Suter warned: “Many don’t even realize they owe tax on their savings until the brown letter lands on their doormat.
“Those who fill out a tax return declare any interest on savings and the subsequent tax due. But for those taxed under PAYE, HMRC receives information from banks and building societies about the interest on savings paid to each individual, from which they then calculate any tax due.
“This means many find themselves paying tax through their payslip every month, often before they even realize they owe the taxman any money.”
This makes using an ISA as a tax-efficient savings tool more important than ever. People can save up to £20,000 a year in an ISA tax-free.
Ms Suter said: “Many savers avoided ISAs after the Personal Savings Allowance was introduced, but now we are seeing people flocking back to ISA accounts to save the taxman grabbing more of their money.
“Pensions can also be useful in reducing people’s tax bills. If someone has just moved into the next tax bracket, they can pay pension contributions to move up into the tax bracket, which means they benefit from both a higher personal savings allowance and a lower tax rate.’