Come on Jeremy, give savers a tax break! We call on the Chancellor to double the tax-free interest allowance from £1,000 to £2,000

Today Money Mail is launching a campaign to double the limit on tax-free interest on savings – from £1,000 to £2,000.

Currently, base rate taxpayers can earn up to £1,000 tax-free interest each year outside of an Isa, higher rate taxpayers can earn £500 tax-free and high-rate taxpayers get nothing.

But these limits – known as the ‘personal savings allowance’ – were introduced in 2016, when the Bank of England’s base interest rate was just 0.5 per cent.

At the time, 95 percent of savers paid no tax on their interest, but that will change radically this year.

Over the past year, interest rates have risen rapidly as the Bank of England tries to tackle inflation. Base interest rates are now at 5 percent and are expected to continue rising.

As a result, savings rates are steadily rising (although the major banks are predictably slow to pass on the increases).

While higher returns for savers are a rare ray of sunshine amid the dismal cost of living, it means many people who have not paid tax on their savings interest for the last seven years suddenly owe money to HM Revenue & Customs (HMRC).

According to freedom of information figures revealed exclusively in The Mail on Sunday last weekend, more than 1.7 million savers had to pay taxes on their savings last year – an 82 percent increase in 12 months.

Savers are expected to owe £6.6bn in interest in the current tax year – nearly double the amount paid last year.

The best rate on a taxable savings account is currently 6.15 percent – a two-year fixed rate bond from FirstSave.

– Check out the best fixed rate savings deals here.

That means just £16,262 in savings would tip a base rate taxpayer on the amount of interest you can earn before tax is due. A higher rate taxpayer would only need £8,131 in the account to pay tax.

Savers who earn more than their personal allowance will have the tax due deducted from their income if they are registered for PAYE.

But there’s a danger that HMRC will start estimating interest earned on coding notices (a letter from HMRC telling you your tax code for the year). This can mean that savers are overtaxed and then have to fight to get their money back.

Savers who are not registered for PAYE must complete an annual self-assessment tax return. Some will have to submit one for the first time. And those who don’t, because they didn’t realize they had to, could be fined.

It will also create a mountain of paperwork for savers and tax officials alike.

In short, it’s a recipe for chaos, especially when HMRC customer service is still struggling to answer the phone in a timely manner following the collapse of the Covid lockdown.

Figures show that HMRC also went unanswered to 37,000 letters for ten months or more.

So today Money Mail is calling on Chancellor Jeremy Hunt to step in. He can – and should – spare millions of diligent savers this looming nightmare of heavy tax penalties and bureaucratic red tape.

Doubling the tax-free amount would mean base-rate taxpayers earning 4 per cent on their savings could keep £50,000 out of Isas without paying tax.

Higher payers would receive an annual stipend of £1,000, up from £500 today.

In fact, Mr. Hunt could remove the distinction between higher and base rate taxpayers. That would remove the abyss that means people earning just over £50,271 would suddenly have to pay an extra tax bill.

Prime Minister Rishi Sunak and Mr Hunt desperately need to bring good news to households – and doubling the tax-free allowance would be a popular and cheap move.

In addition, the tax on savings interest was never intended to be a major source of revenue for the Treasury. According to the most recent Treasury documents, this type of tax raised just £1.2bn in 2021-2022, rising to £3.4bn in 2022-23.

Even if Mr Hunt doubled the fee, experts say the Treasury would likely make more from depositors than it did when interest rates were at an all-time low.

Doubling the fee would also send a positive signal that it pays to be careful; that it is right to take personal responsibility for your finances.

And it would show millions of voters that ministers understand that interest on hard-earned nest egg is your reward for doing the right thing, not a piggy bank for the government to plunder at will.

It would also soften the blow of steadily rising rates, which Mr Hunt has admitted is necessary to contain runaway price increases in the wider economy. Moreover, by encouraging saving, it would help cool inflation and put Britain back on the path to growth.

Under our proposals, savers would still have tax-free Isas as a way of shielding money from the taxpayer. Every penny of interest you earn in an ISA is tax-free. That should not change.

The Isa allowance is currently £20,000 per annum. Savers who have to pay taxes on their interest should consider taking their money to Isas.

One of the best rates on an Isa is currently 5.56 percent for a two-year Zopa bond.

Cash Isa rates are generally lower than their taxable equivalents, but can still generally be a better value when tax is considered. The best one-year fixed rate ISAs pay 5.5 percent, at Leeds Building Society and Nationwide.

The best one-year fixed-rate bond pays 6.05 percent from Atom Bank — which equates to 4.85 percent after tax for a base rate taxpayer.

Baroness Ros Altmann, former Pensions Minister, supports Money Mail’s campaign. “I think there’s a strong case for the chancellor to raise the savings allowance, to encourage more people to save if they can,” she says.

‘In the years since 2008, savers watched helplessly as their returns fell to almost nothing. Many retirees had accumulated savings that they relied on to supplement their retirement income, only to find themselves short on income.

‘Younger people have lost the saving habit. Even with interest rates finally rising, inflation has risen much faster, so savers are still losing money on their savings in real terms.

‘And savers are then hit by a tax that lowers their returns even further, making it less worthwhile to save.

‘The message of the current personal savings is that savers are not valued and that even those who have set aside a few thousand euros will suffer.’

Do you have to pay tax on savings?

You are taxed at the income tax rate on the interest you earn above your personal allowance. But if you’re a very low earner, you may be eligible for two more allowances to lower your tax bill.

UK adults have a personal allowance, which allows people to earn up to £12,570 a year tax-free. If you have not used up this allowance through your wages, pension or other income, you can use it for interest on your savings. This is in addition to your personal savings deduction.

If you earn less than £17,570 you can also accrue up to £5,000 in interest without paying tax on it. This fee of £5,000 is known as your starting savings rate.

To see how these three benefits work together to reduce your tax bill, visit: gov.uk/apply-tax-free-interest-on-savings

How do you pay it?

If you are employed or receiving a pension, HMRC will automatically change your tax code and deduct the tax from your earnings.

To calculate your code, it will estimate how much interest you will receive in the current year by looking at the amount you got last year.

If you are completing a self-assessment tax return, for example if you are self-employed, you must declare interest earned on savings on your form.

If none of the above apply, your bank or building society will tell the IRS how much interest you received at the end of the tax year. HMRC will then inform you if you have a bill to pay.