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Tax take on savings rises again with HMRC set to rake in £10billion this year

HMRC is expected to rake in more than £10billion this year in tax on savings, new data shows.

According to the Government’s latest income tax take report, this marks a staggering £9billion increase compared to 2020.

This comes following two years of record-high savings interest rates and frozen tax allowance thresholds.

AJ Bell’s Laura Suter noted: “The Government is a big winner from rising savings rates. While savers have been enjoying higher rates, the taxman is dipping its hand into their back pocket and nabbing a chunk of the spoils.”

Ms Suter, who is the director of personal finance at the investment platform, continued: “The amount the nation is paying in tax on their savings has increased ten-fold in the past four years, and this year it’s expected the nation will hand over more than £10billion of their savings interest in tax.

“The latest figures show that the Government is predicted to land £10.4billion in tax on savings interest in the current tax year – compared to the £1.4billion it took in 2021/22.”

The estimates for last year have also been significantly revised. Ms Suter noted that while it was initially expected that the nation would collectively pay £6.6billion in tax on savings interest in 2023/24, the actual tax take for that year rose to £9.1 billion. This marks an increase of nearly 40 percent more than anticipated.

Ms Suter said: “If we see a similar increase between the predicted and actual tax take for this year it could mean the nation paying £14billion in tax on their savings.”

Part of the increase in the nation’s savings tax bill is down to a lack of ISA usage to protect cash from tax during a period of rising interest rates, according to Ms Suter.

She explained: “It means that while they have been benefitting from higher savings rates, they have been breaching their tax-free Personal Savings Allowance and paying tax on some of the interest.”

Additionally, Ms Suter said: “A huge part of this rise in tax bills is also that the frozen tax bands mean more people are being pushed into higher tax bands, which means they see their Personal Savings Allowance cut in half, or lost altogether if they find themselves in the additional rate tax bracket.”

Under the Personal Savings Allowance (PSA), basic-rate taxpayers can earn £1,000 in interest before facing tax on their savings interest, while higher-rate taxpayers have a £500 allowance.

Ms Suter said: “In some cases the interest people receive is itself pushing them into the higher tax band – meaning they pay the tax at a higher rate and on more of their money.”

This becomes apparent in the amount of tax paid by additional rate taxpayers, as per the report.

Ms Suter said: “The threshold for the 45 percent tax rate was lowered from £150,000 to £125,150 last year. While basic-rate taxpayers get £1,000 of savings interest tax-free and higher-rate taxpayers get £500, additional-rate taxpayers get taxed on all their savings interest at 45 percent.

“In the current year, the savings tax paid by additional rate taxpayers is due to rise to £8.3billion – astonishingly that is not far off the entire tax take on savings from all taxpayers last year.

“But no one is spared from the tax raid, as basic-rate and higher-rate taxpayers will also be paying more tax on their savings.”

Due to the way savings tax is calculated, Ms Suter warned: “Many won’t be aware that they even owe tax on their savings until a brown letter lands on their doormat.

“Those filling out a self-assessment tax return declare any savings interest and subsequent tax due. But for those taxed under PAYE, HMRC receives information from banks and building societies on the savings interest paid to each individual, from which they then calculate any tax due.

“It means many will find they are repaying the tax through their payslip each month, often before they’ve realised they owe any money to the taxman.”

This makes the use of ISAs more important than ever as a tax-efficient savings tool. People can save up to £20,000 a year in an ISA tax-free.

Ms Suter said: “After the introduction of the Personal Savings Allowance many savers shunned ISAs, but we’re now seeing people flock back to ISA accounts to save the taxman grabbing more of their money.

“Pensions can also be handy in reducing people’s tax bills too. If someone has just moved into the next tax bracket, they can make pension contributions to bring them under the tax band, meaning they benefit from both a higher Personal Savings Allowance and a lower tax rate.”


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