More than 1.7m savers now face a tax bill – here’s how to cut yours

Last year, more than 1.7 million people were hit with a tax bill on their savings — and millions more could be forced to pay this year, according to new figures for Wealth & Personal Finance.

Until recently, only a handful of savers with large bank balances had to pay tax on their interest.

But as the savings rate rose, the number of people caught rose 82 percent in one year alone — up from 972,000 in the 2021-22 tax year.

The exclusive figures were obtained via a Freedom of Information request from HM Revenue & Customs by stockbroker AJ Bell.

Savers stung by the levy paid an average of nearly £2,000 in tax in the year to April. But experts warn that amount could rise to £2,500 over the next year.

HM Revenue & Customs estimates that £6.6 billion will be paid in tax on savings this year, more than five times the amount paid two years ago.

How tax on savings works

All savers have a Personal Savings Allowance, which allows them to earn part of the interest on their savings tax-free. Any interest accrued above these fees will be charged.

Basic rate taxpayers can earn up to £1,000 without paying tax. For higher rate taxpayers this is set at £500 and higher rate taxpayers have no allowance and so pay tax on all their interest.

These fees have not changed since they were introduced in 2016 when interest rates were much lower.

For years, interest rates were so low that savers did not run the risk of exceeding their personal savings.

But rates have since risen and are now at their highest level in 14 years, meaning a base rate taxpayer earning less than £50,270 would be breaching their allowance if they had saved £20,000 in a top-paying account.

If this deduction is exceeded, savers pay tax on their interest at their income tax rate, i.e. 20 percent for basic taxpayers and 40 percent for higher taxpayers. This is known as ‘tax drag’.

> I am concerned that I owe tax on my savings: do I have to file a tax return?

When do you owe savings tax?

For example, a basic rate taxpayer who has £50,000 in the highest paying one-year account in our fixed rate tables – at an interest rate of 6.1 per cent – ​​would earn only 5.3 per cent interest on his savings once the amount he owes tax has been withheld.

This is because they would pay £410 in tax on their £3,050 interest – 20 per cent of the £2,050 they earned over and above their personal allowance. This represents a tax burden of 0.8 percentage point.

A higher rate taxpayer with the same £50,000 savings would face a tax burden of 2 percentage points as they would only earn 4.1 per cent interest on their savings. This is because their tax bill would be £1,020, which would reduce their interest earnings to £2,030.

For those liable for additional tax, this increases to 2.7 percentage points, because their net interest is reduced to 3.4 percent. They would hand over £1,373 of their £3,050 interest earnings to the taxpayer.

Laura Suter, of AJ Bell, says savers should not be penalized for putting money aside for a rainy day, especially since their nest eggs have already been eroded by runaway inflation.

She says, “No one should be penalized for holding a piggy bank for rainy days. Doubling the personal savings deduction would ensure that households are not taxed on cash savings of up to £20,000.”

Savings interest rates are expected to rise further in the coming months, which means that savers’ tax debt will continue to rise. Income tax thresholds are also frozen until at least April 2028, which will drag $2.6 million into the higher tax bracket in the coming year alone, according to the Center for Economics and Business Research.

As a result, millions more savers could be caught with a tax bill on their savings because their personal allowance is halved.