Nest-eggs and dividends to be raided in £24bn savings tax bombshell

Taxes on savings and dividends will exceed £24bn this year, seen as another assault on prudence and frugality.

Savers are facing a £6.6bn hit – more than five times more than two years ago – as rising interest rates mean that even those with humble nest eggs are dragged over the tax-paying threshold.

Critics say it amounts to a ‘hidden tax on steroids’.

And taxes on dividends, the amount of which can be earned tax-free has been reduced, will rise to £17.6 billion, according to new figures from HM Revenue and Customs (HMRC).

Former Pensions Minister Ros Altmann pointed out that the dividend tax hike not only affects the well-to-do, but also pensioners who depend on their share income.

Money savers have been punished with low interest rates for years.

Now rates are rising, but not enough to keep pace with the increased cost of living.

But even that little consolation for those who rely on their nest eggs has a sharp sting in the tail.

That’s because interest on savings is only tax-free up to a maximum of £1,000 per annum for taxpayers on the basic rate and £500 for those paying the higher rate.

Just how venomous that sting is has been revealed by the latest HMRC figures.

They show that tax revenue from savers nearly doubles to £6.6bn in the current fiscal year, compared to £3.4bn a year earlier and just £1.2bn the year before.

It mocks the introduction of the £1,000 personal savings allowance by then-Chancellor George Osborne in 2016, when he said those who had already paid tax on their salary “wouldn’t have to pay a second time if they saved it”.

That is exactly what is happening.

In 2016, a base rate taxpayer could hold just under £70,000 and a higher rate taxpayer could hold £35,000 without paying a cent in income tax.

But since then, rates have risen sharply. The Bank of England raised its key reference rate from 0.1% in December 2021 to 5% today, and markets expect this to rise further to 6.25% by the end of the year.

Today, a base rate taxpayer would only need about £20,000 – or £10,000 for a higher rate payer – to pay tax.

Britain’s top five building societies – Nationwide, Skipton, Coventry, Yorkshire and Leeds – have all backed a campaign by the Daily Mail to increase personal savings allowances.

Laura Suter, head of personal finance at AJ Bell, said: ‘As the Bank of England boosts savers through higher interest rates, the taxman reaches into their back pockets and grabs a piece.

“This is stealth taxation on steroids because not only do people face more tax on their main income because of the frozen tax brackets, but they are also taxed on their savings because they are pushed into the next tax bracket and their untaxed see personal allowance halved, or lose it completely if they end up in the additional assessment bracket.’

For shareholders, the tax-free amount that can be earned from dividends has been reduced, due to changes made by Jeremy Hunt.

It fell from £2,000 to £1,000 in April and will be cut again to £500 from April next year.

HMRC estimates it will collect £17.6bn in tax in 2023/24, up from £15.8bn a year earlier and £13.5bn in 2021/22.

Former Pensions Minister Altmann said of the tax raids: “This appears to be hitting savers over the head if they are already struggling. Many pensioners depend on dividend income from shares, for example.

‘This does not necessarily affect the well-to-do, although there is of course an element in that.

“There is a problem, I think, for savers and those who depend on dividends and I would like to think that the government sees the need to encourage people to save and invest in UK companies.

“If more people do that, you have a better chance of beating inflation.”