Savers will soon be fuelling a multi-billion-pound rise in income tax receipts as the effect of higher interest rates and frozen thresholds bite, new data shows.
The latest Office of Budget Responsibility (OBR) forecast predicts income tax receipts will hit £311.4billion this tax year, rising to £392.1billion by 2029/30.
Jeremy Cox, head of strategy at Coventry Building Society, said: “Savers are now paying billions in income tax on their savings every year. And with the latest official forecast outlining more income tax receipts than it had previously expected, we must assume savers will continue to pay their bit.
“If the share of receipts coming from savers remains the same as this year, that would mean they would be coughing up £11.3billion in income tax from their savings interest next year, and a whopping £13.5billion by 2029/30.”
The Personal Savings Allowance (PSA), introduced in 2016, lets basic-rate taxpayers earn up to £1,000 in savings interest tax-free annually, while higher-rate taxpayers have a reduced allowance of £500.
Additional-rate taxpayers, who earn over £125,140, do not receive any PSA.
Since the PSA was introduced, this allowance has remained frozen. However, as savings interest rates increase, more savers are reaching their PSA limits and are being forced to pay tax on their cash.
But there are ways people can protect their savings from tax, and that’s by investing in Individual Savings Accounts (ISAs).
Mr Cox said: “The good news is that there were no reductions in ISA allowances, meaning everyone can still save up to £20,000 every tax year without paying any tax on the interest or capital gains.”
He continued: “With the Bank of England Base Rate at 5%, savers can beat inflation and earn competitive returns before tax.”
Unlike in previous years of ultra-low interest rates, many taxpayers with modest savings today might not even realise they could be taxed on the interest they earn.
But today’s higher interest rates are landing many who are keeping large sums in normal savings accounts with unexpected tax bills.
Mr Cox said: “Unless they have shielded their savings from tax using an ISA, a higher rate taxpayer with a savings account paying 5% would only need a balance of £10,000 to see their savings interest hit £500, eating up all of their Personal Savings Allowance.”
Mr Cox noted that they would then have to pay the taxman 40% of any further interest they received.