As the personal tax allowance freeze continues, an additional 800,000 individuals might be hit with increased or entirely new tax bills this year based solely on their savings.
Shawbrook Bank experts unearthed this figure as they analysed how many Brits are on the verge of exceeding the personal savings allowance, that is on the edge or already earning over £1,000 in interest each year.
The personal allowance permits people to earn a certain amount of income each year without paying income tax on it, and also covers the amount of interest you can earn annually from savings without being taxed.
Depending on their income tax bracket, the personal allowance typically allows people to take home £1,000 in savings interest per year.
According to CACI, as of last October, the number of people likely to pay tax on their savings alone, due to earning more than £1,000 in interest, stood at 6.1 million. This figure was 5.3 million in October 2023.
Adam Thrower, head of savings at Shawbrook, warned the Telegraph: “Many savers could encounter an unexpected pitfall that eats into their hard-earned interest. For savers wanting to take advantage of the higher rates on offer while protecting hard-earned cash from tax, Isas might be worth considering.”
The personal allowance thresholds have been frozen since the 2021/2022 tax year and despite hopes for a change with a new government, Chancellor Rachel Reeves’ budget confirmed the freeze would continue for the time being.
Due to the freeze, a spike in wage inflation means that many individuals might find themselves with an income tax bill as their earnings push them over thresholds.
Likewise, those already paying the tax could see themselves elevated into a higher income tax band, leading to more considerable payments than ever before.
The Office for Budget Responsibility anticipates that, in the financial year 2025/26, roughly 2.5 million people could be propelled into the higher rate tax bracket, which taxes income at 40% and reduces their savings interest allowance to £500.
About 400,000 individuals are also likely to enter the additional-rate tax bracket, eliminating their savings interest allowance entirely and increasing their income tax liability to 45%.
Moneyfactscompare.co.uk expert Rachel Springall acknowledged: “It would not be surprising for savers to feel disheartened entering 2025. However, it’s imperative that consumers put some time aside to save little and often to build up a nest egg as an emergency safety net.”
She also suggested that ISA accounts, inherently free from tax, might gain traction as almost a million more Britons try to sidestep the looming tax grab on their savings. Alice Haine of BestInvest pointed out a significant concern as numerous savers may be unaware that their emergency funds and nest eggs are subject to taxation.
