- Number of higher-rate tax payers is set to balloon thanks to frozen thresholds
Millions of higher rate taxpayers with more than £14,500 in savings could find themselves footing a shock tax bill.
Record numbers of people have been pulled into the higher tax band, which means their tax-free savings allowance is slashed – and they will lose 40 per cent of interest above it to tax.
The number of higher rate tax payers is set to balloon to more than 7million as thresholds remain frozen, figures from HMRC show.
Half a million tax payers have been dragged into the 40 per cent tax bracket in the past year alone, and higher rate payers now account for almost a fifth of all tax payers.
With the average easy-access account now paying 3.53 per cent, it means higher rate-taxpayers with more than around £14,500 in savings would breach their tax-free savings allowance this tax year, according to rates scrutineer Moneyfacts Compare.
The personal savings allowance allows savers to earn up to £1,000 of interest tax-free. But this is only for basic rate taxpayers, higher rate tax payers see it halved to just £500 and additional rate tax payers have no tax-free allowance at all.
> How the personal savings allowance and savings tax work
Tax bill: HMRC estimates it will collect £6billion in savings tax in the tax year 2025/26
HMRC expects to collect £6.1billion in tax on savings in the 2025/26 tax year. Of this around £1.3billion is expected to arrive from higher rate tax payers.
Additional rate taxpayers, meanwhile, are expected to foot 70 per cent of the bill paid in savings tax at £4.2billion.
Adam French, consumer expert at rates scrutineer Moneyfacts Compare says: ‘The latest statistics from HMRC show how important it is for savers to be aware of their tax liability.
‘Especially many of those who have fallen into paying the higher-rate tax of 40 per cent, whose personal savings allowance has been halved from £1,000 to £500 as a result.’
How to beat the savings interest tax trap
If you are keeping your savings in cash, an Isa will help you avoid a tax bill on the interest.
An Isa is a tax-wrapper that allows you to salt away up to £20,000 in each tax year into savings or investments, with all returns then completely tax-free.
Savers have cottoned on to this fact while interest rates have been high and the savings allowance threshold has been frozen, meaning Isas have had record amount of cash flooding into them.
In April this year alone – the start of the new tax year – a record £14billion flooded into cash Isas.
This was the highest figure for any month since Isas were introduced in 1999.
And it does have an impact when it comes to taking the sting out of a tax bill, which can be seen in the latest HMRC figures.
The nation’s savings tax bill was dramatically lower last year than the Government had initially predicted.
Last year HMRC forecast we would pay £10.4billion in tax on our savings in 2024-25, but this has now revised that down by a whopping £4.5billion to just shy of £6billion.
Laura Suter, director of personal finance at AJ Bell said: ‘This is likely down to two factors: interest rates not staying as high for as long as initially expected, and more people sheltering their savings from His Majesty’s Revenue and Customs in tax-free Isas.
‘We’ve seen record cash Isa usage in the past couple of years, as people are aware that they will be hit with tax on their savings.’
Adam French added: ‘Plenty of savers can avoid this tax bill by making use their yearly Isa allowances, with cash Isas keeping the savings of millions of people free from tax.’
SAVE MONEY, MAKE MONEY
Isa offer
Isa offer
40% off account fees for six months
Fix energy bills
Fix energy bills
Check price cap beating deals with uSwitch
Fee-free Isa investing
Fee-free Isa investing
Free share and ETF dealing, no account fee
5.44% cash Isa
5.44% cash Isa
Rate boosted for three months, then 4.59%
Get £20 off an MOT
Get £20 off an MOT
£20 This is Money Motoring Club voucher
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence. Terms and conditions apply on all offers.
