Multiple million savers face an unexpected tax burden this year, due to a greater number falling under the tax bracket than earlier projections had indicated.
In a significant shift, the number of people paying savings tax in the UK is projected to quadruple over the next four years, primarily due to changes in pension and savings taxation rules. This trend is influenced by reforms tightening tax-free allowances and expanding taxable categories within savings, including pensions and investment income.
Key factors driving this include changes in UK pension schemes and taxation, reduced tax-free thresholds on savings income, wider application of tax rules on investment income, demographic and economic influences, and increased reporting and compliance requirements.
Notable changes include the introduction of multiemployer collective defined contribution plans, which alter how pension contributions and withdrawals are taxed, potentially increasing tax liability for more people. Over recent years, the UK government has adjusted or phased out some tax-free allowances like the Personal Savings Allowance, causing more taxpayers with modest savings income to become liable for tax on interest and dividends.
As the population ages and more people rely on savings and pensions income to fund retirement, more individuals enter taxable brackets for these incomes. This expectation aligns with broader UK policy trends aimed at increasing revenue from savings and pensions tax while encouraging more regulated pension plan participation.
Currently, the best-buy two-year fix Isa rate stands at 4.2% from Cynergy Bank, while the best-buy rate for an easy access Isa is 5.44% from CMC Invest. The maximum amount that can be put into Isas each tax year remains at £20,000.
HMRC makes calculations based on data received from banks and building societies. The number of people paying savings tax is projected to increase from 2.52 million in 2024/25 to 2.64 million in 2025/26. The average person is now paying £2,300 in tax on their savings.
It is important to note that there can be a time lag of up to 14 months between interest payment by a savings provider and reporting to HMRC. Notification of a changed tax code will arrive as an HMRC envelope, often referred to as a 'P800' form. HMRC's income tax data is matched with bank records to determine who needs to pay more tax.
The number of higher rate taxpayers affected will surge from 405,000 to 897,000 over the same period. One in eight higher-rate taxpayers will be handing over some of their savings interest to HMRC - a jump from the 1 in 25 that were four years ago.
It is crucial to use tax wrappers like cash Isas or investment Isas to protect savings from the taxman. However, it is essential to keep track of the changing tax landscape and adjust savings strategies accordingly.
If you are unsure about your tax situation, it is advisable to consult a financial advisor or HMRC directly for personalised advice. Delays in sending notifications can occur, with HMRC sometimes delaying sending notifications until March, just weeks before the new tax year.
- The increased number of individuals paying savings tax in the UK is projected to be driven by changes in personal finance, including pension schemes, taxation, and investment income.
- Reforms in UK finance policies have led to reduced tax-free thresholds on savings income and a wider application of tax rules on investment income.
- With the introduction of multiemployer collective defined contribution plans and adjusted or phased-out tax-free allowances like the Personal Savings Allowance, more taxpayers are becoming liable for tax on their savings income.
- To protect savings from the taxman, it is crucial to use tax wrappers like cash Isas or investment Isas and to keep track of changing finance trends, particularly in personal-finance, in order to adjust savings strategies accordingly.
