Nearly a million more savers could face unexpected tax bills this year that eat into their hard-earned cash.
More than 6.1 million accounts are now projected to breach the personal savings allowance, marking an increase of 800,000 in just one year, a new analysis has shown.
Experts warn that this “unexpected pitfall” could significantly eat into savers’ interest earnings as higher rates make tax considerations increasingly important for account holders.
The surge comes as millions of workers are already facing the prospect of being pushed into higher rates of income tax due to frozen thresholds.
The personal savings allowance, introduced in 2016, allows savers to earn a set amount of interest before paying income tax.
- Basic-rate taxpayers earning between £17,571 and £50,270 can receive up to £1,000 in interest tax-free.
- Those in the higher-rate bracket, earning £50,271 to £125,140, see their allowance reduced to £500.
- Additional-rate taxpayers earning above £125,140 receive no personal savings allowance.
Around 6.1 million accounts are set to receive more than £1,000 in interest, up from 5.3 million in October 2023
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Adam Thrower, head of savings at Shawbrook, said that higher savings rates on offer meant tax was becoming a consideration for more savers.
He said: “In the past, tax on savings was something that not many needed to think about due to the low interest rates on offer.
“However, with higher rates now available, 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.”
Those earning below £17,570 benefit from both a £1,000 allowance and a starting savings rate of £5,000, though this reduces by £1 for every £1 earned above the £12,570 personal allowance.
Data from monitoring platform CACI shows that 6.1 million accounts are set to receive more than £1,000 in interest, up from 5.3 million in October 2023.
These figures, which exclude ISAs where interest remains tax-free, indicate a significant rise in accounts likely to generate tax bills for their owners.
Alice Haine, of investment company Bestinvest, said: “Keeping tabs on exactly how much interest you have earned over the course of the financial year can be hard for people to track, particularly if they have multiple savings accounts with different interest rates applied.
“Savers might not even realise they could be liable for tax on their nest eggs at all and may be surprised to receive a bill from HMRC.”
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The increase of 800,000 affected accounts within a year demonstrates the growing impact of frozen thresholds on savers’ tax liabilities.
This trend is particularly significant as higher interest rates mean more savers are earning returns that exceed their personal savings allowance.
According to the Office for Budget Responsibility, 2.5 million people will be pushed into the higher rate tax bracket of 40 per cent by 2025-26.
This shift will halve their personal savings allowance from £1,000 to £500. An additional 400,000 individuals will move into the additional-rate tax bracket.
These taxpayers will see their personal savings allowance reduced to zero, meaning all their savings interest will be subject to tax.
The impact of frozen thresholds means more savers will face reduced allowances as their income pushes them into higher tax brackets. ISAs are emerging as a crucial solution for savers looking to protect their interest earnings from tax.
Rachel Springall, of Moneyfactscompare.co.uk, highlighted their importance: “The freeze means savers have years to endure no increase to income tax thresholds.
“Hard-pressed savers will inevitably breach their personal savings allowance, so cash Isas will be a popular lifeline for those looking for a tax-free wrapper.”
Savers can currently utilise an overall ISA allowance of £20,000 per year. Additional options include Lifetime ISAs with a £4,000 allowance and Junior ISAs offering £9,000 annually.
All interest earned within these ISA wrappers remains tax-free.