Savers in the UK are set to contribute a larger share of income tax receipts in the coming financial year than at any point since the 2007/08 financial crisis, calculations by Coventry Building Society have revealed.
The building society’s analysis claimed that the proportion of income tax generated through savings interest has risen dramatically in recent years.
This surge is attributed to higher interest rates and frozen tax thresholds, resulting in savers paying an estimated £10.4billion on savings interest this tax year.
The figure represents a nearly sixfold increase from the lowest point during the pandemic years, marking a significant shift in the tax landscape for British savers.
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Over the past 15 years, the proportion of income tax generated through savings interest has averaged around 1.49 per cent annually. The lowest point was reached during the pandemic in 2021/22, at just 0.61 per cent.
Since then, the percentage has risen dramatically to 3.45 per cent, nearly six times higher than the pandemic low. This increase is primarily due to higher interest rates and frozen tax thresholds.
Jeremy Cox, head of strategy at Coventry Building Society, commented: “Millions of people are already paying more tax on their hard-earned savings pots due to fiscal drag.
“But the Government’s forecasts suggest more will be paying income tax on their savings as they exceed personal savings allowances.”
The recent dramatic rise is affecting savers across the UK. Many are finding their Personal Savings Allowances exhausted more quickly than before.
As a result, tax-free cash ISAs have seen a boost in popularity. These accounts offer a way for savers to protect their hard-earned money from income tax on interest.
However, those with savings outside ISAs are increasingly at risk of paying tax on their interest. This situation underscores the growing impact of fiscal policies on personal finances.
The current adult ISA allowance stands at £20,000, offering savers a substantial opportunity to protect their money from income tax on interest earned.
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Experts advise taking advantage of this allowance before potential changes in the upcoming Budget.
This presents a “small window of opportunity” for savers to act early and utilise the current tax rules.
By moving savings into ISAs, individuals can shield their funds from the increasing tax burden on savings interest.
This strategy is particularly relevant given the rising proportion of income tax generated through savings interest.
