Savings tax warning as shock HMRC bill arrive on millions of doorsteps
Hundreds of thousands of savers may soon be hit with a new unexpected tax bill. HMRC data indicates that over two million individuals will pay tax on their savings interest this tax year, a significant increase from 1.17 million in the previous tax year.
This includes approximately an extra 500,000 additional rate taxpayers becoming subject to the levy, bringing the total number to over one million. A Freedom of Information request by AJ Bell revealed that 954,000 basic rate taxpayers will pay tax on their savings this tax year.
UK residents receive a personal savings allowance, allowing basic rate taxpayers to earn up to £1,000 in interest tax-free, while higher rate taxpayers can earn up to £500 without paying tax. However, additional rate taxpayers do not receive any allowance.
As income tax thresholds are frozen and interest rates remain high, more people are being pulled into paying tax on their savings. Laura Suter, director of personal finance at AJ Bell, cautioned that those benefiting from high interest rates could face a surprise bill from HMRC.
She explained: "For those who have ditched and switched to get better rates and are now going to be hit with tax on their money, they often won't realise until a brown letter lands on their doormat. Those completing a self-assessment tax return will declare any savings interest, and subsequent tax due.
"But, for those taxed under PAYE, HMRC will calculate any tax due based on information sent to them by banks and building societies. It means many taxpayers will find there is a deduction made from their payslip each month, often before they've even realised they owe any money to the taxman."
She further explained why more individuals are paying the tax: "A tricky combination of interest rates rising, cash ISAs being shunned for decades, more people moving into higher tax brackets and seeing their Personal Savings Allowance cut, and the tax-free allowance being frozen means lots of people are being dragged into the tax. The figures are lower than previous estimates from the Government, which is likely due to a number of factors.
"We know more savers have used cash ISAs to protect their savings from tax, thanks to high-profile campaigns about the number of people who are likely to be hit with tax bills." You can save up to £20,000 a year in ISAs, and you do not pay any tax on the interest or growth in investments wrapped up in an ISA.
Ms Suter said: ""Bank of England data shows that April was a record-breaking month for cash ISAs, with £11.7billion being put in the accounts, marking the highest amount since ISAs were introduced in 1999. This trend has continued, with more people using ISAs since tax-year end to protect their cash from unwanted tax."