HMRC has begun issuing tax demand letters to households whose savings interest exceeds the personal savings allowance, which stands at £500 for higher-rate taxpayers. The tax authority has recouped £8.4 billion from savers as a result of frozen tax thresholds, a policy continued by the current Labour government after being introduced by the previous Conservative administration.
Sharp Rise in Tax Collections
Data from HMRC shows that the amount collected from tax on savings interest for the year to April was expected to be 38 per cent higher than the previously forecast £6.1 billion, because interest rates stayed higher for longer. This figure is £7 billion higher than the amount collected four years earlier. Interest on savings held outside an Isa is liable for income tax if it exceeds the personal savings allowance, which stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers have no allowance at all.
Frozen Thresholds Impact Millions
These thresholds have been frozen since they were introduced in 2016, with more than 2.7 million people caught in the tax net last year. Derek Sprawling, of savings app Spring, said: “Higher interest rates have helped savers earn stronger returns, but they have also pushed more people above their personal savings allowance. For many, that means a tax bill on interest that may previously have gone unnoticed or been covered by allowances.”
Warning from Investment Experts
Charlene Young, of investment platform AJ Bell, warned alongside the new figures from the tax authority: “The figure was revised up 38 per cent following sticky inflation and interest rates staying higher for longer.” HMRC also estimated that it would bring in £8.2 billion in savings interest tax in this tax year. Young attributed the fall to the “rush to use the cash Isa allowance.” She added: “Over £15 billion was stuffed in cash Isas in the first two months of this tax year alone, which is no surprise when you consider that savers will face a triple threat of tax hits next year.”
