Key Highlights
- The average saver now pays £2,300 a year in tax on their savings despite tax-free allowances.
- HMRC is set to send out tax demands averaging £2,300 to households with savings accounts.
- Rising interest rates and frozen Personal Savings Allowance have contributed to the rise in savings tax.
- Many savers are unaware they’ve breached their allowance until HMRC contacts them.
The Taxing Reality of Saving
You might think this is new, but… it’s not. For years, financial experts have been warning about the hidden cost of saving in the UK. And now, with interest rates skyrocketing and tax allowances frozen, the average saver is facing a £2,300-a-year tax bill.
A Tax-Free Mirage
Back in August, Laura Suter from AJ Bell highlighted how ‘falling foul of the savings tax trap can be costly’. Figures show that even after accounting for tax-free allowances, savers are still paying £2,300 a year. That’s about 31% of their earnings on non-ISA accounts.
Interest Rates and Tax
The key driver? Interest rates have risen considerably in recent years, while the Personal Savings Allowance has remained untouched since its introduction over eight years ago. Basic rate taxpayers are now entitled to only £1,000 in interest annually from non-ISA accounts, with higher and additional rates seeing their allowances cut.
Hidden Costs
Many savers moving to better-paying cash savings accounts find themselves breaching the tax-free limit without realizing it. HMRC is poised to send out demands averaging £2,300 to households holding these accounts. People on PAYE will see their take-home pay suddenly fall when HMRC adjusts their tax code.
So, why do we still have savings tax?
You’d think with the rise in interest rates and wages, the Personal Savings Allowance would’ve been adjusted too. But nope, it’s stuck at 2018 levels. This means more savers are being dragged into the tax net than ever before.
