As the Government attempts to balance its books, HM Revenue and Customs (HMRC) has revealed over 2.6 million taxpayers will be hit with tax bills on their savings.
According to a report, the average saver is paying a £2,300 tax bill for interest occurred on their savings this year.
It is estimated that during the 2025/26 tax year, HMRC will collect £6 billion from over 2.64 million savers – an increase of over 120,000 taxpayers in the previous year.
If you want to protect your savings, it is important to explore the options available and seek urgent advice from your accountant.
How does savings tax work?
Savings tax is charged at the taxpayers’ income tax rate and paid on the interest accrued in savings. You become liable when you are pushed over the personal savings threshold.
The personal savings allowance may allow you up to £1,000 of interest tax-free depending on the income tax band you are in.
The more you earn, the smaller the allowance. Individuals earning £125,140 or more do not benefit.
There are several forms of savings that are taxable, including current account interest, savings account interest, interest from peer-to-peer lending, Government bonds, and credit union savings interest.
Without checking your savings and examining the interest involved, you could be at risk of being pushed into a threshold where a tax bill could come your way.
Why are more savers paying tax?
The two main factors behind the increased number of savers paying tax are the continued frozen tax thresholds and higher interest rates.
With Income Tax currently frozen until 2028, as individuals earn more and save more, they are being pushed into higher tax brackets, making their savings liable for tax.
The upcoming Autumn Budget could see the Income Tax threshold extended as Chancellor Rachel Reeves tries to balance the Government’s book.
Higher interest rates are also pushing savers beyond the threshold.
Interest rates in the UK have been climbing since January 2022. Despite finally decreasing slowly, rates remain extremely high at 4.25 per cent, double the Government’s two per cent target.
The Bank of England monitors interest rates in the UK and will decide if cuts or increases are required. They have been holding and making modest cuts over the last few months, but not enough to stop the increase in savers paying more tax.
Bank of England will cut interest rates further this week, but not enough to meet the Government’s two per cent target.
How can I protect my savings?
Being proactive gives you the best opportunity to protect your savings and limit the damage of a tax bill.
A useful way to protect your savings is to open an Individual Savings Account (ISA).
You can earn tax-free interest on up to £20,000 through an ISA each year, making it a useful savings option if you are going to exceed the personal savings allowance.
Another option is to monitor savings interest rates, since these will fluctuate.
However, this doesn’t apply for fixed-rate accounts, as interest has already been agreed with the account provider.
It is also advisable to check when your interest is paid, as spreading the payments out can help to keep your returns below the personal savings allowance.
Is there support available?
It is important to protect as much of your hard-earned savings as possible and ensure you are not hit with an unwanted tax bill.
If you are concerned about the potential of a savings tax bill, our specialist accountants can help.
