🔔 Savers are squeezed as they pay billions in tax to HMRC

Author: Anna Bowes
28th June 2024

According to the latest forecasts from HMRC, the government can expect to receive an extra £1.3 billion from savings tax this financial year – a staggering amount of £10.4 billion – up from £9.1 billion last year. But this 14% increase in the tax being paid pales into insignificance when you look at how much more is being raised via savers now, compared to a few years ago.

In the tax year 2021/22 – so from April 2021 to April 2022 – the amount of savings tax paid was £1.4 billion, so this latest estimate shows a 642% increase in the amount of tax that savers are paying on the interest they are now earning.

Of course, the key reason for this massive hike is down to the increase in interest being earned on our savings. Since December 2021 the base rate has increased 14 times from an historic low of 0.10% to its current level of 5.25%.

As a result. the interest on savings accounts has soared too. Back in December 2021, the best easy access account was paying a piffling 0.75% and the top 1-year bond was offering just 1.37%. Today - June 2024 - you can earn as much as 5.20% on easy access accounts and the top 1-year bond is paying 5.24%.

So, on a balance of £10,000, the interest earned on the easy access money could have increased from £75 a year to £520 – a 593% increase! You can understand then why the tax on our savings has gone up so much.

Whilst this sounds like a nice problem to have, although inflation has currently come back down to a better level, it had increased to as much as 11.1% in October 2022, far higher than even the best savings accounts could offer. It’s only been in the last few months that savers have had accounts available that are keeping up with the rising cost of living.  When inflation is higher than the amount of interest you can earn, the real value of savings has been eroded. So having to pay much more tax adds to the pain.

And whilst there are some tax-free allowances that savers can use, unfortunately they have been frozen for years – and these ‘stealth taxes’ add to the whole problem.

The Personal Savings Allowance (PSA) of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers (additional rate taxpayers do not have a PSA) has remained at the same level since its inception in 2016 when the base rate was just 0.50% - and therefore savings rates were far lower too.

And the cash ISA allowance has also been at £20,000 since April 2017!

And let’s not forget that our Personal Allowance has also been frozen, which means that more people are now paying higher tax rates.

The HMRC figures show that of the £10.4 billion it expects to receive in the current tax year, £1.14 billion will be paid by basic rate taxpayers, £2.4 billion by higher rate taxpayers, whilst additional rate taxpayers will pay £6.8 billion.

What can savers do?

It’s obvious, but if you’ve not already used your ISA allowance elsewhere make sure that you open a cash ISA as soon as possible, so that you are earning tax free interest for longer. The good news is that cash ISA rates have been rallying recently, so there are some good deals to be found. Take a look at our Easy Access Cash ISA table and the Fixed Rate Cash ISAs tables.

And especially for higher and additional rate taxpayers, have you maxed out your National Savings & Investments (NS&I) Premium Bond allowance of £50,000 per person?

Although not a traditional savings account, as rather than interest your bonds are placed into a prize draw each month, whenever you do win a prize that will be tax free. Although there is the chance that you could win no prizes at all, if you were to earn prizes equivalent to the prize fund interest rate of 4.40%, as a basic rate taxpayer, that is the same as earning 5.50% on a taxable account, it’s 7.3% for a higher rate taxpayer and a whopping 8% for an additional rate taxpayer.

And if you have a spouse that is paying a lower rate of income tax, then you could consider making sure you are fully utilising their tax-free allowances.

Take a look at the latest #AskAnna, to check the tax-free savings allowances that could be available to you.