Thousands of low-income savers across the UK are set to receive an unwelcome letter from HMRC demanding a tax payment of £992, a direct consequence of the government's frozen personal allowance policy.
The Frozen Allowance: A Stealth Tax on Savers
The personal allowance threshold has been held at £12,570 since 2021. This freeze, extended under the current Labour Party government, is now pulling thousands of households who were previously exempt into the tax net. Analysis by investment platform AJ Bell reveals the stark reality: an individual with an income of £15,549 and £5,000 in savings interest now faces a combined tax bill of £992.
Sarah Coles, head of personal finance at stockbroker Hargreaves Lansdown, issued a stark warning. “This will affect an awful lot of pensioners with modest personal pensions and reasonable savings, who rely on the starting rate to keep their tax bills down,” she said.
How the Tax Trap Snaps Shut
The mechanics of this tax hit revolve around the little-known starting rate for savings. Antonia Stokes of the Low Income Tax Reform Group highlighted its importance, stating, “The starting rate for savings is not well known but it is a valuable tool in the tax system for some people on low incomes.”
This valuable relief disappears quickly. Once a person's non-savings income, such as a pension or wages, exceeds the personal allowance, the starting rate for savings reduces by £1 for every £1 earned over the £12,570 threshold. It vanishes entirely when other income reaches £17,570.
For those earning over £12,570, the Personal Savings Allowance (PSA) is available, worth £1,000 for basic rate taxpayers. However, this alone is not enough to shield many from a significant bill. A saver with a £15,550 pension income would only be eligible for £2,020 of the starting rate, as their income is £2,980 over the personal allowance. Combined with the £1,000 PSA, this still results in a £396 tax bill on £5,000 of savings interest.
A Nasty Shock in the Post
The combination of these factors means that many individuals, particularly pensioners relying on modest savings, are facing unexpected demands from the taxman. Ms Coles cautioned that “If you missed the implications of the frozen rate for your circumstances, the tax bill could come as a nasty surprise.”
When approached for comment, a spokesman for HM Treasury stated: “We do not comment on speculation around future changes to tax policy outside of fiscal events.” For those affected, however, the speculation is over, and the tax bill is very real.
