HM Revenue & Customs is poised to send out tax demands averaging £2,300 to households holding savings accounts, as rising interest rates push more cash savers into the tax net. The typical saver is now paying about 31% tax on their savings once tax-free allowances are taken into account.
Brits will earn around £20bn in interest from non-ISA cash accounts this year, a sharp rise that has left more people facing tax bills on money they expected to keep. Basic-rate taxpayers can earn £1,000 a year in interest from non-ISA accounts tax-free, higher-rate taxpayers with income above £50,270 get a £500 allowance, and additional-rate taxpayers earning £125,140 or more have no Personal Savings Allowance at all.
The scale of the demands reflects how much the savings landscape has changed since the Personal Savings Allowance was introduced more than eight years ago. Tax thresholds have been frozen, interest rates have climbed, and money that once sat comfortably outside the tax system is now generating taxable income for a much wider group of savers.
Laura Suter, head of personal finance at AJ Bell, said figures disclosed to the investment platform show the average person is paying £2,300 in tax on their savings, with an effective rate of about 31% once the tax-free allowances are factored in. She said the government has frozen tax thresholds and left the Personal Savings Allowance untouched since it was introduced more than eight years ago, and warned that what was once a tax affecting wealthier savers is now catching out everyday basic-rate taxpayers.
The change is particularly sharp for people who have moved money into better-paying cash accounts in search of a better return. Suter said many will not realise they have breached their allowance until HMRC comes knocking, and many of those who have shifted savings to higher-paying accounts will not know they have crossed the tax-free limit until the taxman catches up.
For people who complete a self-assessment tax return, any savings interest has to be declared there. For those on PAYE, HMRC typically collects the money by adjusting the taxpayer’s code so the tax comes directly out of their payslip, which can leave savers with a sudden fall in take-home pay.
The issue is no longer confined to wealthier households with large portfolios of cash. With interest rates rising sharply and the tax system staying still, ordinary savers are increasingly getting letters, tax code changes or deduction notices for interest they earned simply by leaving money in a bank account.
Back in August, Suter had already flagged how costly it can be to fall foul of the savings tax trap. This latest wave of tax demands shows that the problem has only grown as more interest is paid out and more of it ends up exposed to tax.
That leaves the next stage in the hands of HMRC: the demands are coming, the tax code changes are likely to follow, and for many households the surprise will not be the bill itself but how ordinary their savings have become in the eyes of the taxman.
