- Record withdrawals surpass deposits as high cost of living strains billpayers
- Banks criticized for low savings rates and failure to pass on interest rate increases
- More individuals expected to pay income tax as thresholds remain frozen
In May, billpayers drained their bank and savings accounts at unprecedented rates, prompting charities to warn about high living costs.
The Bank of England announced a £4.6 billion deficit in bank and building society deposits.
Since comparable statistics began 26 years ago, this was the highest level recorded.
The rising cost of living, such as groceries, mortgages, and rent, is straining household finances.
Richard Lane, director of external affairs at the debt charity StepChange, emphasized the importance of assisting individuals in accumulating savings to protect against unforeseen expenses.
“This is the latest in a long line of warnings that more and more people are struggling to cope with the rising cost of living,” he said.
“Cost pressures are pervasive and eroding people’s financial flexibility, making them more susceptible to risky borrowing and problem debt.”
The strain on institutions
In April, net deposits totaling £3.7 billion were added to bank and building society accounts. The most recent figure represents an abrupt reversal of that trend.
There was a net withdrawal of £3.8bn from accounts in May, compared to an increase of £5.3bn in April when savings held in National Savings and Investment accounts were included.
Banks have been accused of offering “pitiful” interest rates to savers and neglecting to pass on the higher Bank of England base rate in their returns.
Chancellor Jeremy Hunt stated that it was “taking too long” for higher interest rates to be passed on to depositors. Those with immediate access accounts were disproportionately affected by the problem, he stated.
UK Finance, the trade association for the banking industry, stated: “Savings rates are influenced by a variety of factors, not just the Bank of England’s base rate – one important factor is whether a person desires instant access or can deposit funds for a longer period.
In contrast, Treasury Committee members have regularly cited savings rates not keeping pace with mortgage rates in recent months.
Bestinvest personal financial specialist Alice Haine said some savings offerings had improved, but savers must stay watchful.
“Despite improved savings rates, households emptied their savings accounts. “While many may be dipping into their savings to cover rising living expenses, savers should still shop around for the best deal to ensure their money is working as hard as possible,” she advised.
Additionally, some households are paying more in taxes. HM Revenue and Customs estimates that there will be an additional 1,300,000 income tax filers this fiscal year compared to the previous 12 months, with the preponderance of these being women.
The chancellor has maintained the personal allowance for income tax at £12,570 until April 2028. On income below this threshold, basic rate taxpayers pay no tax. Those who receive a rise that raises their income above this threshold will begin paying taxes.
The chancellor froze the tax rate threshold in April, lowering it to the maximum.
The number of people paying the highest “additional” rate increased from 555,000 to 862,000 this year. 5.28 million people paid 40% income taxes, rising to 5.59 million.
Former pensions minister Steve Webb is now a partner at the consulting firm LCP. He stated, “A combination of high inflation and frozen tax allowances means that well over eight million people aged 65 or older are now paying tax, a doubling over the last two decades.”
The number of mortgage approvals granted to homebuyers increased from 49,000 in April to 50,500 in May, according to data from the Bank of England. Remortgage approvals increased from 32,500 to 33,600 during the same period.
However, lenders continue to increase rates on new fixed-rate agreements.
