According to new figures obtained by stockbroker AJ Bell through a Freedom of Information request, over 1.7 million people were hit with a tax bill on their savings last year. This represents an 82% increase from the previous year. The figures suggest that millions more could be forced to pay taxes on their savings this year as well. On average, those affected by the tax paid nearly £2,000 in the last year, but experts predict that this amount could reach £2,500 in the coming year. HM Revenue & Customs estimates that a total of £6.6 billion will be paid in tax on savings this year, which is more than five times the amount paid two years ago.
The tax on savings works through the Personal Savings Allowance, which grants savers a tax-free threshold for their interest earnings. Any interest earned above this threshold is subject to taxation. Currently, basic rate taxpayers can earn up to £1,000 tax-free, while higher rate taxpayers have a threshold of £500. Additional rate taxpayers do not have any allowance and are taxed on all interest earnings. These limits have remained unchanged since they were introduced in 2016, when interest rates were much lower.
In the past, low interest rates meant that most savers did not have to worry about exceeding their personal savings allowance. However, with savings rates now at a 14-year high, even basic rate taxpayers with less than £50,270 in savings could exceed their allowance if they have £20,000 in a high-paying account. Once the threshold is exceeded, savers pay tax on their interest at their income tax rate. This results in a “tax drag,” where the interest earned is reduced.
Experts warn that the amount of tax owed by savers will continue to rise as savings rates are forecasted to increase further. In addition, income tax thresholds have been frozen until at least April 2028, which means more people will fall into higher tax bands. As a result, millions more savers could be hit with a tax bill on their savings as their personal savings allowance is halved.
To minimize tax bills, there are several strategies savers can consider. Using tax-free allowances such as Individual Savings Accounts (ISAs) and pensions can help shelter investments from taxes. Couples can also consider distributing savings between spouses to take advantage of different tax rates. Additionally, Premium Bonds from National Savings & Investments provide a tax-free option for savers to potentially win cash prizes. However, it’s important to note that there is a risk of winning nothing.
Overall, the increase in tax bills on savings highlights the need for savers to carefully manage their investments and take advantage of available tax-saving options.
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