Up to a million savers unaccustomed to paying tax on their nest eggs will face a £2bn shock if new rules come into effect, according to an analysis by a leading accounting firm.
The changes are likely to penalize depositors with bills of up to £2,000 over a two-year period – including fines for those who accidentally forget to comply, Azets research has found.
Former Tory leader Iain Duncan Smith said ordinary savers were being punished, while Baroness Altmann, a former pensions minister, said: “Savers have not been treated fairly for years.”
People with modest shareholdings are allowed to pay dividends tax-free if they fall below a certain level.
Likewise, they can sell those shares for a profit without paying taxes if the profit is small enough.
Changes made by Chancellor Jeremy Hunt (pictured) mean levels of those exemptions are falling, leaving even those with modest assets liable
But changes introduced by Chancellor Jeremy Hunt mean the level of those exemptions is falling, leaving even those with modest assets liable.
The dividend payment fell from £2,000 to £1,000 in April this year and will be cut again to £500 from April next year.
Annual capital gains tax exemptions have fallen from £12,300 to £6,000 in the current tax year and will fall further to £3,000 in 2024/25.
Rising interest rates and higher wages will further exacerbate the complex picture by potentially making account holders liable to tax on the interest earned.
Savvy savers can offset tax charges by depositing up to £20,000 a year into tax-free Individual Savings Accounts (ISAs).
But others who have accumulated small amounts over the years and may not have received tax planning advice may fall victim.
John Hiddleston, deputy director at Azets, said: ‘Soon, significant numbers of people who are not accustomed to paying tax on their savings will probably have to do so.
‘If you are a tax resident you are required to report this to HMRC.
‘However, many of these people will not be used to filing a tax return, they will not be notified to do so by HMRC, and they will not realize they are taxable.
Therefore, many ordinary people could receive surprise tax bills, with significant fines for accidental non-compliance.
“We estimate this will affect hundreds of thousands of people – up to a million – with bills of up to £2,000.”
The picture is complicated by rising interest rates – which have risen from 0.1 percent in December 2021 to 4.5 percent today – and rising wages, at a time when income tax brackets are frozen.
Anyone earning more than £50,270 pays 40 per cent tax on income above that level.
That threshold is frozen, even as the value of wages has been eaten away by a rise in the cost of living, dragging millions of middle-income earners into the higher tax bracket.
Recent research shows that one in five taxpayers will pay at that rate by 2027.
It means that while higher interest rates on savings may provide some measure of comfort, they may also have tax implications that could cause a sting in the tail.
That’s because interest on savings is only tax-exempt up to a value of £1,000 – and then only for basic rate taxpayers. The allowance halves to £500 for higher income taxpayers.
So an employee who just got dragged into the 40 percent margin and enjoys higher interest payments could suddenly be taxed on that amount as well.
It is the final blow after savers have suffered for years from low interest rates.
Rising interest rates and higher wages will further exacerbate the complex picture as account holders may become taxable on interest earned
Baroness Altmann said: ‘The problem is that many of them have received virtually nothing for their savings over the past decade and have never had to file a tax return and may not know anything about it.
“The concern is that if they don’t declare their savings income, they could be fined.”
And she warned that things could be even worse under Labour, amid reports it could lift capital gains tax from its current 20 per cent level to match the top 40 per cent income tax rate.
“While savers are suddenly hit by a £2bn collective tax increase, if we get a Labor government we will only get higher capital gains taxes,” Ms Altmann said.
“It’s not fair right now – but savers haven’t been treated fairly for years.”
Former Conservative leader Iain Duncan Smith, MP, said of the government changes: ‘It’s a tax increase. I’m afraid to say I strongly disagree. It discourages people from investing their money.
These are not big savers. It’s the kind of thing you’d expect Labor to bring in.
‘Ordinary savers will be punished – even though you have already taxed them once.’
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