Almost 1.8mn UK savers are paying tax on interest earned from banks and building societies, as rising interest rates and frozen tax thresholds combine to punish those with cash savings.
The data, obtained in a freedom of information request by AJ Bell, found a huge leap last year in the number of people hit with a tax bill on cash savings interest.
The FOI request to HMRC found that, in the tax year ended April 2023, the number of savers paying tax on savings income rocketed 82 per cent to hit 1.77mn.
Income Tax liabilities on savings income | |||
Tax Year | Number of taxpayers | Total tax due | Average tax per person |
2018-19 | 926,000 | £1.6bn | £1,746 |
2019-20 | 1,010,000 | £1.7bn | £1,650 |
2020-21 | 951,000 | £1.4bn | £1,492 |
2021-22 | 972,000 | £1.2bn | £1,271 |
2022-23 | 1,770,000 | £3.4bn | £1,942 |
Source: HMRC/AJ Bell. | |||
Despite cash savings losing value in real terms, taxpayers owed HMRC over £3.4bn in tax on money earned through cash accounts last year.
It means the average bill incurred by someone stung with tax on cash savings amounted to almost £2,000, although AJ Bell said this is likely skewed higher by some wealthy individuals paying large tax bills if they hold considerable sums in cash.
Laura Suter, head of personal finance at AJ Bell, said: “Nobody should be punished for holding a rainy day savings pot, and doubling the personal savings allowance would ensure households aren’t taxed on cash savings up to £20,000, based on current rates."
AJ Bell said the figures could worsen, with more people likely to be caught as interest rates rise and the personal savings allowance remains frozen.
The government is expected to land a £6.6bn tax take this year, with even more savers likely to be affected.
Suter said: “Rising rates and a frozen personal savings allowance means some individuals are being taxed despite having relatively modest pots of cash set aside for a rainy day.
“With cash interest rates now above 5 per cent in some cases individuals with between £10,000 and £20,000 in cash can expect to pay tax on their savings interest.
“To add insult to injury, because inflation is so high, they aren’t even making a real return on their money – yet they are still being taxed.”
Tax bills on cash interest exceeding the personal savings allowance are paid either through self-assessment, or deducted from income through a tax code adjustment.
Many will not have been aware they owed tax on cash savings interest and will unexpectedly find their tax code changed to deduct the money from their payslip.
Suter said: “Those filling out a self-assessment tax return will declare any savings interest, and subsequent tax due.
“But, for those taxed under PAYE, HMRC will calculate any tax due based on information sent to them by banks and building societies. It means many taxpayers will find there is a deduction made from their payslip each month, often before they’ve even realised they owe any money to the taxman.”
The personal savings allowance currently stands at £1,000 and £500 for basic rate and higher rate taxpayers respectively.
Additional rate taxpayers get no tax break, meaning those with income over £125,140 now pay 45 per cent tax on any cash interest outside an Isa.
