Thousands of savers across the UK are at risk of being slapped with a “significant” tax bill on earned interest within the next couple of months, according to new research from Paragon Bank.
The financial institution is reminding bank and building society customers to take action as nearly 2.4 million fixed term savings accounts are set to mature in the next three months.
When a savings account matures, this means it has reached the end of its fixed rate term and the product will no longer offer the same interest rate it initially provided.
Paragon’s analysis of CACI data found that 1.57 million fixed-term adult ISA accounts are set to mature in April, as well as around 826,000 non-ISA fixed-rate equivalent accounts.
The end of the 24/25 tax year and beginning of the 25/26 tax year falls on April and the bank is warning that it will be busiest month for accounts maturing, with one million fixed products reaching the end of their term.
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Savers could be hit with a tax bill in next couple of months, experts warn
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Some 719,000 accounts are expected to mature in March with many savers likely needing to pay tax on any interest earned over the personal savings allowance, which is £1,000 for basic-rate taxpayers and £500 higher-rate taxpayers.
According to Paragon Bank, around 535,000 non-ISA adult fixed-term savings accounts due to mature over the next three months will have generated enough interest to incur a tax payment if the account holder is a higher-rate taxpayer.
Furthermore, the bank is sounding the alarm that an estimated 352,000 basic-rate taxpayers will likely be hit with a tax charge from HM Revenue and Customs (HMRC) due to crossing this threshold.
It should be noted that additional-rate taxpayers do not receive a personal savings allowance and this threshold is separate from any ISA allowance an account holder may have.
Derek Sprawling, Paragon Bank’s managing director of Savings, urged bank and building customers to “consider their options” when it comes to attempting to avoid any looming tax charge.
He explained: “Over 500,000 non-ISA fixed term accounts are maturing with sufficient interest to incur a tax bill for the holder and I would expect those savers to consider switching to an ISA variant if they don’t already utilise their annual tax-free allowance.
“The upcoming months will be a pivotal time for millions of savers as their fixed-rate accounts mature. It’s therefore essential for savers to consider their options carefully to match their current, and future, returns.
“With a significant portion of these accounts earning rates which were set when underlying reference rates were at their peak and showing signs of upward movement, most maturing savers will, unfortunately, likely not be able to match their previous rate when it comes to an end.”
The savings market has remained competitive in recent years due to the Bank of England’s decision to raise the base rate in its ongoing fight to bring down the consumer price index (CPI) rate of inflation.
While this has bolstered returns for savers, it has meant that customers are more at risk of crossing the personal savings allowance, which has remained at the same level since its introduction in 2016.
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Fiscal drag is resulting in more Britons paying tax
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This is widely known as fiscal drag, which occurs when tax allowances remain the same over a period when wages, inflation and/or interest is rising, leading to taxpayers being dragged into higher brackets.
Alice Guy, the head of pensions and savings at interactive investor, previously highlighted the detrimental impact fiscal drag has on people’s incomes and wider finances.
She explained: “Fiscaldrag is silent and ruthlessly efficient way of raising the tax burden over time. It works by freezing tax thresholds so that we pay tax on more and more of our income as our wages rise with inflation. It’s less obvious than raising tax rates, but potentially has an even bigger impact on taxpayers over time.
“Frozen tax thresholds affect all of us, not just higher earners, because the frozen personal allowance means even lower earners gradually pay tax on more of their income.”
