HMRC is set to write to 1.7 million people with bills over their personal savings, following a revised forecast that shows a record 4.5 million savers will now face tax on their interest income.
The figure marks a significant increase from the 2.7 million savers the Labour government's tax arm had initially predicted in March would face tax bills over the next 12 months. The updated forecast, released this week, indicates that 1.7 million more people will be affected than previously estimated.
Why more savers are being taxed
Sarah Coles, of investment platform AJ Bell, explained the drivers behind the surge: “Higher interest rates will automatically boost what people are making on their savings, and when they’re held outside a cash Isa, it means running the risk of a bigger tax bill.”
She added: “At the same time, inflation over this period was significant, so those who were in work were likely to have had pay rises to help them keep pace, and those in retirement were likely to have had at least some of their income linked to inflation. It raises the risk that their incomes pushed them over frozen income tax thresholds, where their personal savings allowance halved or disappeared overnight, and the level of tax they paid on the excess shot up too.”
Tax allowances and rates explained
Under current rules, a basic-rate taxpayer can earn £1,000 in savings interest in a tax year without paying tax. Anything above that incurs 20 per cent tax. The allowance reduces to £500 for higher-rate taxpayers, who pay 40 per cent tax, while additional-rate taxpayers have no tax-free savings allowance and must pay 45 per cent tax on all savings interest earned outside an Isa.
These thresholds have been frozen, meaning that as incomes rise with inflation, more savers are being pushed into higher tax brackets or seeing their allowances reduced.
Advice for savers
Andrew Wright, at Paragon Bank, issued a warning for savers: “Anyone with money outside an Isa should check where their savings are held and make full use of the tax-free allowance available to them.”
The letters from HMRC will inform recipients of their tax liabilities and may prompt many to reconsider their savings strategies, particularly those with significant cash holdings outside tax-efficient wrappers like Isas.
