Millions of savers across Britain are facing unexpected tax bills as frozen income thresholds pull more people into higher tax bands.
Analysis of Office of Budget Responsibility (OBR) figures by Coventry Building Society reveals a concerning trend for UK taxpayers.
An estimated 5.9 million more people will pay higher taxes this tax year, with this figure expected to rise to 7.7 million by 2027/28. This represents a dramatic increase from last year’s 3.9 million additional taxpayers.
The phenomenon known as “fiscal drag” occurs when tax thresholds remain static while incomes rise, pulling workers into higher tax brackets.
For savers, this means potentially significant reductions in the amount of interest they can earn tax-free. With the tax year end approaching on April 5, time is running out for savers to protect their money from unnecessary taxation.
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Savers are being hit by shock tax bills, Coventry Building Society warns
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Of the 5.9 million additional taxpayers, 2.2 million more people are expected to pay higher-rate tax at 40 per cent this year. This will halve their Personal Savings Allowance from £1,000 to just £500.
A further 3.3 million more people will start paying tax at the basic rate of 20 per cent as their income exceeds the personal allowance threshold of £12,570.
These changes mean millions of savers could face unexpected tax bills on their savings interest. Many are unaware that crossing into a higher tax band significantly reduces the amount of interest they can earn before taxation.
The impact is particularly severe for those just tipping into the higher rate band, who will see their tax-free savings allowance cut by half despite potentially only earning a few pounds above the threshold.
The tax-free allowance on savings interest is set at £1,000 for basic rate taxpayers. This drops dramatically to just £500 for anyone paying even a penny of higher rate tax on income over £50,270.
For additional rate taxpayers earning more than £125,140, the allowance disappears completely. Recent increases in interest rates, combined with frozen thresholds, have created a windfall for the Treasury.
As a result, the Labour Government is expected to collect £10.4billion from tax on savings interest in this tax year alone.
Since April 2016, high street banks and building societies no longer deduct tax from savings interest automatically.
Instead, HM Revenue and Customs (HMRC) changes tax codes so most savers pay the tax due from their salary or pension income.
Those who complete Self Assessment must declare any interest earned beyond their personal savings allowance directly to HMRC.
Jeremy Cox, the head of Strategy at Coventry Building Society, issued a warning to Britons looking to bolster their savings.
He shared: “Millions of savers are in for a nasty surprise as they’re hit with unexpected tax bills or reductions in their take-home pay or pensions, to recover the tax owed from exceeding their personal savings allowance last year.”
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“The Government’s own forecasts are a clear warning that people must act quickly to review their finances and take steps to protect their savings from unnecessary tax,” he added.
“With speculation that the Chancellor may reduce cash ISA allowances, now is a good time to take advantage of the current benefits.
“The good news is that it’s still surprisingly simple to shelter savings from income tax. By using tax-free ISAs, savers can protect up to £20,000 each tax year.
“With just weeks left to make full use of this year’s £20,000 ISA allowance, and uncertainty over whether future allowances could be cut, savers should act now before the tax year ends on April 5.”
