Chancellor Jeremy Hunt, before speaking to the media at Victoria Place shopping centre, Woking, in response to the Bank of England’s monetary policy report in which he raised interest rates from 3.5% to 4%. Picture date: Thursday February 2, 2023. PA photo. See the PA story Economy Rate. Photo credit should read: Jordan Pettit / PA Wire – Jordan Pettit / PA Wire
More than a million Britons have started paying tax on their savings this year as a result of secret raids by the Treasury and higher interest rates, analysis by The Telegraph shows.
Ten straight Bank of England rate hikes of 0.1pc to 4pc have boosted income on thousands of savings accounts after years of disappointing returns.
However, the £1,000 tax-free allowance on savings interest, which was designed to spare most people the taxman, has not been increased in line with inflation since it was introduced in 2016.
Consultancy LCP said HMRC data suggested the frozen threshold alone had dragged an extra 125,000 people into paying tax on their savings as a result of inflation.
When interest rates rise, the number of people who can expect to pay tax on their savings rises from 1.4 million to about 2.4 million in 2023, according to LCP and former pensions minister Steve Webb.
Mr Webb said that the Savings Allowance was no longer fit for purpose.
“When the Personal Savings Allowance was first introduced in 2016 it meant that most people would pay no tax on their savings,” he told the Telegraph.
“But the world of 2023 is very different. We no longer have rock-bottom interest rates and inflation has eroded the value of the savings allowance. As a result we can talk about an additional million people who are now paying taxes on their savings.
“If the intention of the original policy was to exclude ordinary savers from being taxed on their savings, then the rate of savings allowance needs serious reconsideration as it is no longer achieving its original objective.”
The calculation only applies to taxable savings income, with premium bonds and other accounts such as ISAs providing a tax-free way to save. However, the £20,000 ISA allowance has also been frozen since 2017, leaving even more people exposed to the demands of the tax authorities.
Under HMRC rules, basic rate taxpayers can earn up to £1,000 in interest without income tax, while higher rate taxpayers have an allowance of £500.
The LCP said the failure to increase the allowance in line with inflation means basic rate taxpayers have missed out on around £236 of tax-free savings income. Higher rate taxpayers have lost £618.
Taxable savings interest income is 2.6 times larger than in 2016, the LCP said, based on returns from savers investing in NS&I income bonds, which offer easy access and monthly interest.
In 2016, when the tax-free allowance was introduced, a basic rate taxpayer would need £100,000 in NS&I income bonds at an interest rate of 1pc to pay any savings tax. In 2023, just £38,461 in NS&I income bonds at an interest rate of 2.6pc will trigger a demand from HMRC.
Pressure is mounting on Chancellor Jeremy Hunt to announce tax cuts in the upcoming March budget, although he has repeatedly denied giving gifts.
Mr Hunt has already set an income tax cap until 2028.
The Budget Responsibility Office, the government’s tax and spending watchdog, estimates the chancellor’s move will generate an extra £26bn of revenue every year until 2028 and pull around six million people into higher tax bands.
The rise in High Street banks and building societies Bank of England rates for savers has been much slower than for borrowers with variable rate mortgages.
The average immediate access account still only pays 0.83pc, according to bank data, while the average return in a fixed-rate bond is 1.67pc.
There are already some exceptions to income tax for savings interest for people out of work or pensioners receiving other annual income of less than £17,570, who can earn up to £5,000 in interest on their savings and not pay extra tax We do.
