- Savings tax payers triple due to rising interest rates
- Nearly 2.1 million people pay savings tax in 2023
- Cash Isas increasingly used to avoid savings tax
According to recent data, the number of persons anticipated to pay tax on savings interest will have tripled in three years.
As interest rates climb and people reach their tax-free threshold, many more savers must pay savings tax.
According to a Freedom of Information request from AJ Bell, nearly 2.1 million people are likely to pay tax on their savings this year, up from approximately 647,000 in the 2021/22 tax year.
The number of people projected to pay savings tax increased to 1.1 million in 2022/23 and again to 1.9 million in 2023/24. According to data, about 2.1 million people are eligible for savings tax in the current tax year.
The number of basic-rate taxpayers impacted by the tax will approach 1 million, up from half a million in 2022/23.
However, these results are lower than the government’s initial prediction.
According to a FOI request by AJ Bell last year, the government anticipated that 2.7 million people would be taxed on their savings in the 2023/24 tax year, but this figure has since been reduced to 1.9 million.
AJ Bell believes this could be due to several factors, including more individuals using cash Isas to safeguard their savings from tax, fewer people converting to higher interest savings accounts, and interest rates higher than HMRC had predicted.
According to Paragon Bank data, savers deposited £42 billion in cash in the year’s first six months.
At the end of June, there was £351.6 billion in adult cash Isas, up £42 million from £309.3 billion at the end of December 2023, as savers rushed to avoid the tax sting.
Though lower than the government’s expectations, it still means that almost one in every thirty basic-rate taxpayers is set to pay tax on their savings this year, up from less than one in every 100 three years ago.
Almost one in every ten higher-rate taxpayers is projected to pay the tax, up from one in every twenty-five just three years ago.
In June, HMRC announced it expected to earn an additional £3.8 billion in savings tax revenue this year.
According to its most recent forecasts, the tax savers pay on savings interest will increase to £10.37 billion in 2024/25, up from £6.6 billion in 2023/24.
HMRC expects to receive £10.37 billion in savings interest tax, with £1.14 billion coming from basic rate taxpayers, £2.4 billion from higher rate taxpayers, and £6.8 billion from additional rate taxpayers.
The Personal Savings Allowance (PSA) allows consumers to earn some interest on their savings tax-free, but it has remained at current levels since its introduction more than eight years ago.
The PSA is currently set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers do not receive an exemption and must pay tax on all cash interest received outside of a tax wrapper.
When the PSA was implemented in April 2016, the best one-year fixed-rate bond on the market paid 1.91%; thus, a basic-rate taxpayer could have exceeded the £1,000 PSA with a deposit of £52,357.
Today, the best one-year bond yields 4.95 percent. Therefore, a basic rate taxpayer would exceed the threshold by £20,230.
Similarly, the best easy-access account available in April 2016 paid only 1.45%; therefore, the introductory rate PSA would have been exceeded with a deposit of almost £69,000.
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With top rates currently earning roughly 4.9%, £20,000 in an easy-access account would earn £980 in interest.
The main benefit of cash Isas is that savers can save up to £20,000 every tax year to safeguard their savings interest from taxation. Any interest received is tax-free, unlike easy-access or fixed-rate savings accounts.
Laura Suter of AJ Bell said: ‘A delicate combination of rising interest rates, cash Isas being avoided for decades, more individuals moving into higher tax bands and seeing their PSA lowered, and the tax-free allowance being capped means that many people are getting drawn into the tax net.
‘We know that more savers have used cash Isas to protect their funds from tax, thanks to high-profile advertisements concerning how many people are expected to face tax bills.
‘Previously, savers had to choose between receiving the best interest rate with a non-Isa account and using a cash Isa, but Isa rates have increasingly matched conventional savings rates in recent years, removing one of the hurdles to using an Isa.
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