The government is under pressure to raise tax thresholds on the amount depositors can earn in interest before being taxed.
More than six million savers are facing tax bills on their interest for the first time in seven years – and many could be forced to pay hundreds of pounds.
The Personal Savings Allowance (PSA) was introduced in April 2016 by the then Chancellor, George Osborne.
At the time, it meant that most savers in Britain no longer had to pay tax on the interest they earned on their savings.
Tax nightmare looming: Millions of savers love being forced through the hassle of filling out tax returns because of higher savings rates.
However, the PSA has remained at the same level, despite the savings rate now being almost three times higher than in 2016.
Base rate taxpayers are eligible for a £1,000 PSA. This means that they can receive up to € 1,000 per year tax-free in savings interest.
Higher rate taxpayers have a PSA of £500 each year. Rate taxpayers do not get a PSA.
According to an analysis by Coventry Building Society, an estimated 3.8 million additional savers will be dragged into this higher tax bracket this financial year.
What does this mean for savers?
When savings rates were in the doldrums, the PSA seemed generous. At the beginning of last year, the most accessible bill paid only 0.5 percent.
A base rate taxpayer would have needed £200,000 in an account to reach the allowable interest level of £1,000 before tax was due. This meant that most people didn’t have to think about taxing their savings at all.
Even for 40 percent higher payers, the amount you could save before going over the fee was £100,000.
The PSA was introduced in April 2016 by the then Chancellor, George Osborne
But now, with the best easy access rates paying as much as 3.88 percent and the best flat rates paying as much as 5.35 percent, the situation has changed.
In an account that pays 3.88 per cent, you reach your personal savings with £25,400 as the base payer and £12,700 as the higher rate.
The best one-year fixed-rate savings agreement currently pays 5.26 percent.
Someone using this account exceeds their annual allowance by a pot of £19,000 as a base payer, or just £9,500 as a higher rate.
Last week, former Pensions Minister Baroness Altmann called on the Chancellor to raise tax thresholds on savings income to reflect higher interest rates.
“It’s about the principle of rewarding rather than punishing savers who have struggled for so long,” she said.
Anna Bowes, co-founder of savings website Savings Champion, also thinks it’s time the government tried to change the PSA.
“The PSA has been ignored since its inception in April 2016,” says Bowes.
‘The allowances seemed generous at launch – but as the savings rate has risen, the PSA is being used up with less and less cash on deposit. It’s time for a review.
“Especially given the ongoing cost-of-living crisis, which means every penny counts.”
According to an analysis by Coventry Building Society, an estimated 3.8 million additional savers will be dragged into this higher tax bracket this financial year.
How can the government raise the PSA?
In April 2016, the highest paying easy-access account paid 1.45 percent, according to Savings Champion.
This means that tax-paying savers would have needed a deposit of £68,966 to break the £1,000 PSA, assuming you had no other savings accounts.
Today they need a deposit of just over £25,000 to earn £1,000 in gross interest from the highest paying, easily accessible accounts.
For the government to achieve parity with when the surcharge was introduced, it would need to raise it by about 175 percent.
This would raise the base rate PSA to £2,750 and for the higher rate taxpayers to £1,375.
Another possible way the government could look to increase the fee is to raise it in line with inflation.
Since the PSA was raised, inflation is up 31.81 percent, according to This is Money’s inflation calculator.
If the government increased the PSA in line with this, the base rate PSA would rise to £1,320 and the higher base rate would rise to £660.
It is likely that millions of additional savers will now be required to file a tax return because of the PSA.
The PSA has also brought cash Isas into sharper focus. Savers can funnel £20,000 away from the taxpayer each tax year.
This probably explains why a record £17.8 billion was poured into them in March and April 2023, saving cotton from a potential tax bill.
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