Jeremy Hunt urged to raise savings tax threshold

Jeremy Hunt is under pressure to save millions of prudent depositors from a “stealth tax on steroids.”

After enduring years of meager returns on their nest eggs, savers are finally starting to reap the benefits as interest rates rise.

But in what amounts to an assault on self-sufficiency and frugality, even those with a modest amount set aside face tax bills on the interest they earn.

Former Pensions Minister Baroness Altmann last night called on the Chancellor to raise tax thresholds on savings income so that savers can earn more before handing over cash to the tax authorities.

“It’s about the principle of rewarding rather than punishing savers who have struggled for so long,” she said.

Basic rate taxpayers can earn up to £1,000 in interest on their savings without paying tax, under rules introduced by George Osborne seven years ago when he was chancellor.

The tax-free allowance for higher-rate taxpayers is £500, while those paying the additional 45p rate have no allowance at all and therefore pay tax on all their interest.

Osborne said when announcing the personal allowance that those who have already paid tax on their salary “don’t have to pay tax a second time if they save.” But rising interest rates mean that’s what’s happening.

Osborne’s policies saved millions of people from having to pay taxes on their savings.

At the time, with interest rates near zero, it was much more difficult to earn interest income of £1,000 or even £500 a year and become a tax resident as a result.

A base rate taxpayer would have needed a piggy bank of nearly £70,000, while the equivalent figure for a higher rate taxpayer was around £35,000.

But with interest rates rising, a base rate taxpayer would now have to set aside just over £20,000 for the tax to take effect, while a higher rate taxpayer would only get £10,000.

More than 6 million people are expected to face tax bills on their interest for the first time in seven years. Hunt is urged to raise the tax thresholds.

Altmann said: “Especially at a time when governments urgently need to curb inflation, it makes sense to try to encourage more people to save rather than spend, thus dampening demand for goods.”

She said that even though interest rates are rising, savers are still losing out in real terms because returns lag the rate of inflation. “This means people lose real value from their savings and after tax they lose even more,” she said.

Figures from investment platform AJ Bell show that the amounts HMRC raised from tax in the 2022-23 financial year rose sharply to £3.4bn – more than double the £1.3bn recorded the previous year.

But that covered a period that began when the Bank of England benchmark interest rate was still below 1 percent.

So for the current fiscal year — with a bank rate of 4.5 percent and likely rising to 5.5 percent before the end of the year — it’s likely to be significantly higher.

That’s partly due to more and more people being dragged into the higher 40 percent tax threshold, which has been frozen, even though inflation is eroding the value of earnings.

Laura Suter, from AJ Bell, said: ‘The government is pulling in more and more money from the average saver as the combination of rising interest rates and frozen tax deductions means many will pay tax on their savings for the first time ever. This is stealth tax on steroids.

Not only are people facing more tax on their main income due to the freezing of income tax brackets, they are also being hit with tax on their savings by being pushed into the next tax bracket and seeing their tax-free personal savings deduction cut in half or lost altogether .’