Millions more Britons will face a tax bill on their savings this year as frozen thresholds and higher interest rates have dragged them into the net, new data shows.
A previous Freedom of Information (FOI) request from AJ Bell shows that the number of basic-rate taxpayers affected is expected to approach one million in the 2023/24 tax year, up from around half a million in 2022/23.
Combining higher and additional rate taxpayers, a total of 2.07 million people are expected to pay tax on their savings interest — a significant increase from just 650,000 three years ago. However, there are steps people can take to legitimately avoid this.
Laura Suter, director of personal finance at AJ Bell, said: “More than two million people will face a tax bill on their savings interest this tax year, as rising interest rates and frozen tax thresholds have pushed more people into these tax bills.
“The thorny issue is that lots of people won’t realise they owe tax until a brown letter lands on their doormat. While those filling out a self-assessment tax return will declare any savings interest and subsequent tax due, those taxed under PAYE get any tax liability calculated by HMRC based on information sent to them by banks and building societies.
“Often, this will then mean your tax code is adjusted, and you repay the tax through your payslip each month – eating into your take-home pay.”
While it might be too late to solve the problem for the current tax year, Ms Suter said: “You can organise your savings and dodge some sneaky tax traps to avoid being landed with an unexpected tax bill next year.”
How to beat the savings tax trap
While the Personal Savings Allowance protects most savers from paying tax on interest, the threshold has not changed since it was introduced over eight years ago.
Currently, basic-rate taxpayers can earn up to £1,000 in interest tax-free, and higher-rate taxpayers have a £500 allowance. Additional-rate taxpayers receive no exemption and are taxed on all interest earned outside of tax-free accounts.
With some savings interest rates exceeding the 5% mark in recent months, it’s become much easier for people with larger deposits to pass their personal allowance thresholds without realising.
Ms Suter said: “Lots of people may have racked up a hefty tax bill already this year because they didn’t realise they’d breached their Personal Savings Allowance.”
The finance expert urged that while the new tax year in April offers a fresh start, there’s still time to take action before the current tax year ends to prepare for next year.
Ms Suter said: “If you have large savings outside an ISA, you’ll need to get started now to use up the current tax year’s allowances.”
Ms Suter explained that, since the introduction of the Personal Savings Allowance, many savers shunned ISAs. However, the decision is “hitting savers’ pockets now”, as many find they have too much money to move it into an ISA in one year.
People can save up to £20,000 tax-free in an Individual Savings Account (ISA) per tax year.
Ms Suter said: “The annual ISA limit of £20,000 is generous, but if you’ve spent years accumulating savings outside of an ISA, you might find you hit that limit pretty quickly when you want to transfer your money into the tax-efficient account.
“If you have an ISA allowance remaining this tax year, consider whether you should move some cash into an ISA. Equally, if you have a partner, you could split the cash savings between you to use up both ISA allowances.”
Ms Suter added: “If your partner pays income tax at a lower rate, it might make sense to move any savings that will attract tax into their name. Just make sure the savings interest doesn’t tip them into the next tax bracket and undo all your good organising work.”
