The average saver is now paying £2,300 a year in tax on their savings, even after tax-free allowances are taken into account, according to the latest data from financial experts
HMRC is poised to send out tax demands averaging £2,300 to households holding savings accounts. The latest figures from financial analysts show that the average saver is now paying £2,300 each year in tax, even after accounting for tax-free savings allowances.
Back in August, Laura Suter, Director of Personal Finance at AJ Bell, highlighted how ‘falling foul of the savings tax trap can be costly’.
She said: “Figures disclosed to AJ Bell show the average person is paying £2,300 in tax on their savings, with an average effective rate of tax of about 31% – although tax is charged at the individual’s marginal rate of either 20%, 40% or 45%, the average rate of tax indicates the typical percentage sent to the taxman once tax-free allowances have been factored in.
“The amount of income earned on savings has skyrocketed as interest rates have increased and tax bands have been frozen, creating a welcome windfall for the cash-strapped Treasury.
“Brits will earn around £20bn interest from non-ISA cash accounts this year, a more than fourfold increase over a five-year period.” For money-saving tips, sign up to our Money newsletter here
A key driver behind the sharp rise in savings tax is that interest rates have increased considerably in recent years, as have wages, yet the Personal Savings Allowance — the threshold of interest you can earn on savings within a given tax year — has remained frozen.
Ms Suter adds: “The government has frozen tax thresholds and left the Personal Savings Allowance untouched since it was introduced more than eight years ago.
“With interest rates rising sharply, more savers are being dragged into the tax net. What was once a tax affecting wealthier savers is now catching out everyday basic-rate taxpayers.
“Many won’t realise they’ve breached their allowance until HMRC comes knocking.”
Basic rate taxpayers are entitled to earn £1,000 in interest annually from non-ISA accounts (funds held within an ISA are shielded from tax up to £20,000 per year), while higher rate taxpayers earning above £50,270 see their Personal Savings Allowance cut in half to £500.
For additional rate taxpayers — those earning £125,140 or more — no Personal Savings Allowance exists whatsoever, meaning every single pound of interest earned is subject to tax.
Anyone who exceeds their allowance, whether by accident or by design, can expect to hear from HMRC, with the tax authority typically adjusting your tax code to recover any outstanding tax owed — unless you routinely complete a self-assessment tax return.
Ms Suter adds: “Many of those who have moved their money to better-paying cash savings accounts and find themselves breaching the tax-free limit won’t realise until the taxman catches up.
“People who have to file a self-assessment tax return will need to declare any interest earned, but for those on PAYE, HMRC will collect the money directly from their payslip by adjusting their tax code. That can lead to a nasty surprise when people see their take-home pay suddenly fall.”
