HMRC is set to rake in billions of pounds as continued stealth tax and higher interest rates leave millions of savings accounts at risk of triggering a tax bill.
In April, more than six million savings accounts were set up to trigger a tax bill this year, according to Shawbrook’s analysis.
That’s more than double the three million accounts at risk of being taxed in April 2023.
Basic rate taxpayers can earn £1,000 in interest each year tax-free, while higher rate taxpayers are limited to £500 in annual interest. Higher rate taxpayers have no tax-free savings allowance.
Freezing tax brackets, which pull more people into basic and higher tax brackets as income rises, and higher interest rates have led to a dramatic increase in savers exceeding their personal savings.
It means a basic rate taxpayer earning £2,000 in interest could be hit with a £200 tax bill, rising to £600 for higher rate taxpayers and £900 for additional rate taxpayers.
AJ Bell director of personal finance Laura Suter has warned that the amount Britons pay in tax on interest on savings has “increased” in recent years.
The latest forecast suggests £10.4bn will be paid in savings interest tax this tax year, up from £1.4bn collected in 2021/22.
AJ Bell has shared a rough guide to the size of savings a basic rate taxpayer with a personal savings allowance of £1,000 could have before having to pay tax, based on different interest rates.
AJ Bell worked out an approximate pot of savings a person could have before tax kicks in for various interest rates. Those on the lowest incomes can have an initial allowance of £5,000.
AJ BELL | GB NEWS
Suter said part of the problem was “people not using ISAs to protect their cash savings”.
She explained: “Rates may be marginally higher outside of an ISA, but for those people who find themselves breaching the Personal Savings Allowance, it can be a false economy if the extra interest is eclipsed by the tax bill.
“Another factor is the frozen tax bands, which means more people are pushed into higher tax bands and their personal savings contribution is halved as a result. Some will lose it entirely if they find themselves paying an additional tax rate.
“If you find you lose your tax-free cash interest allowance because your salary goes up, you could find yourself paying tax on the savings and at a higher rate of tax at the same time.”
Rachel Springall, financial expert at the company money comparison website moneyfactscompare.co.uk told GB News it was “vital” that savers take some time to check the interest they earn on their savings banks to ensure No they are violating their own post.
She added: “Interest may be more likely to trigger a tax burden now compared to previous years due to higher interest rates.
Do savers have to contact HMRC?
Those who think they have already breached or will breach Personal Savings Allowance may wonder if HMRC will be chasing them for a tax bill.
Financial expert Rachel Springall told GB News: “Savers who believe they are on track to breach their personal savings during the tax year can inform HMRC before the savings provider calculates the interest earned, which is confirmed by HMRC.
“To avoid paying tax back as a lump sum, HMRC would normally change someone’s tax code for the following year so that additional tax is taken on any income during that year.
“If savers feel they have paid too much tax, they can apply for a refund using the R40 form, which consumers can do for the current or previous tax years.
“Self-assessors can report any income from savings or investments as part of their normal tax return.”
The tax that savers would have to pay on fixed bonds can vary depending on the terms, Springall explained.
However, HMRC states that tax is due “when it is received or made available to the recipient”.
Springall explained: “As an example, if a saver has interest paid out as income, then the savings paid will be taxable at that point.
“It’s worth checking the total interest that should be earned when the bond matures, as it could exceed the PSA for that year.”
Tax credits on savings interest
Most people can accumulate some interest on their savings without having it taxed.
Annual tax-free savings contributions, which are renewed each tax year, include:
- Personal surcharge
- Introductory rate for savings
- Personal savings allowance
If the Personal Allowance is not used up on income such as a salary or pension, the saver can earn tax-free interest up to the amount of their Personal Allowance. The standard personal allowance is currently £12,570.
A person can also qualify for the initial savings rate – which allows a maximum of £5,000 in interest tax-free – but this discount is reduced as income from other income grows.
People with other income of £17,570 or more are not eligible for the initial savings rate.
Springall explained: “People on low incomes can also take advantage of zero ‘starter rate’ income tax on up to £5,000 of savings interest.
“This is reduced for every £1 earned above the personal income tax credit of £12,570 (tax year 2024/25).”
Personal Savings Allowance allows basic rate taxpayers – which refers to people earning between £12,571 and £50,270 (tax bands are different in Scotland) – to earn up to £1,000 tax-free.
Springall explained: “This means that savers will only have to pay tax on the interest on savings above this amount.”
Higher-rate taxpayers – who pay 40 per cent tax on annual income between £50,271 and £125,140 – will get a reduced limit of £500.
Additional rate taxpayers, who are taxed at 45 per cent on income above £125,140, ​​have no tax-free savings allowance.
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An ISA is a tax-free savings package
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What is an ISA?
An ISA, which stands for Individual Savings Account, is a tax-free savings package.
The maximum amount a person can put into an ISA each tax year is £20,000. Money can be deposited into one account or the contribution can be split into multiple accounts.
There are four types of ISA – Cash ISA, Stocks and Shares ISA, Innovative Finance ISA and Lifetime ISA.
The latter, the Lifetime ISA, has its own specific rules and an annual limit of £4,000, which is included in the ISA’s annual contribution of £20,000.
Springall said: “Those who want to avoid paying tax on their savings would be wise to use their ISA allowance every year. Investing in a cash ISA protects the money from tax and has no impact on the PSA.
“These can be very useful for savers in the short and long term, however using a stocks and shares ISA could get you more returns in the long term, but it also comes with risks.”
Adam Thrower, head of savings at Shawbrook, also highlighted the tax-free benefits of ISAs.
He said: “Savers may want to consider a fixed-term ISA to lock in high rates for a year longer.
“With Bank of England interest rates likely to have peaked, expectations of the first cut have been growing for some time, and when it does, it could reduce the interest rates offered on savings.
“Locking in now can secure higher interest rates for a longer team and using an ISA to do this can keep your money without any surprise tax bills.”