A freeze on tax thresholds means some 800,000 more people will be forced to pay tax on savings income this year, according to a new analysis.
The personal savings allowance, introduced in 2016, is a set amount of interest that a saver can earn before tax is due.
The maximum amount of tax free interest is £1,000 for a basic rate taxpayer (20 percent), but it falls to just £500 for a higher rate taxpayer (40 percent).
It is zero for those high earners who fall into the additional rate (45 percent) – tax bracket.
These tax rules apply to accounts held outside an ISA, which allow savers to build up their savings free of tax.
Monitoring platform, CACI, examined October’s data from the Current Account and Savings Database which showed 6.1 million accounts are set to receive more than £1,000 in interest. This is up by around 800,000 on the 5.3 million in the same month a year earlier.
Separately, a freeze on income tax thresholds, which was introduced by the Conservatives in 2021, means millions of workers across the economy are being hit by higher taxes. This freeze is due to run through to 2028.
Adam Thrower, head of savings at Shawbrook, said that higher savings rates on offer from financial institutions in recent years mean tax is becoming a consideration for more savers.
“In the past, tax on savings was something that not many needed to think about due to the low interest rates on offer,” he said.
“However, with higher rates now available, many savers could encounter an unexpected pitfall that eats into their hard-earned interest.
“For savers wanting to take advantage of the higher rates on offer while protecting hard-earned cash from tax, Isas might be worth considering.”
According to the Office for Budget Responsibility, 2.5 million people will be pushed into the higher rate tax bracket of 40 percent in 2025-26. This would halve their savings interest allowance from £1,000 to £500.
Another 400,000 will move into the additional-rate tax bracket, meaning their allowance will be reduced to zero.
Rachel Springall, of Moneyfactscompare.co.uk, told the Telegraph: “The freeze means savers have years to endure no increase to income tax thresholds.
“Hard-pressed savers will inevitably breach their personal savings allowance, so cash Isas will be a popular lifeline for those looking for a tax-free wrapper.”
Alice Haine, of investment company Bestinvest, said: “Keeping tabs on exactly how much interest you have earned over the course of the financial year can be hard for people to track, particularly if they have multiple savings accounts with different interest rates applied.
“Savers might not even realise they could be liable for tax on their nest eggs at all and may be surprised to receive a bill from HMRC.”
Income tax thresholds were frozen until 2028 by the previous Conservative government, and the decision has not been changed by Labour.
There is a separate savings allowance, known as the starting rate for savings, for people earning less than £17,570.
