One in 25 basic rate taxpayers could be caught in the savings tax trap (Image: Getty)
The number of people paying tax on their savings income is set to quadruple in just four years, according to data from HMRC. Information revealed in a freedom of information (FOI) request by AJ Bell, shows that 2.64 million people are expected to be hit with tax on their savings in the 2025/26 tax year.
The figure is an increase of 120,000 from last year and is four times higher than in 2021, when just 647,000 people were liable for the tax. It means that one in 25 basic-rate taxpayers will pay tax on their savings this tax year, as Rachel Reeves scrambles to plug holes in the nation’s finances. Laura Suter, director of personal finance at AJ Bell told The Telegraph: "The government has frozen tax thresholds and left the Personal Savings Allowance (PSA) untouched since it was introduced more than nine years ago.
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“With interest rates rising sharply, more savers are being dragged into the tax net without any policy change – it’s tax by stealth.
“What was once a tax affecting wealthier savers is now catching out everyday basic rate taxpayers.
“Many won’t realise they’ve breached their allowance until HMRC comes knocking.”
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According to analysis, the average person is currently paying ￡2,300 in tax on their savings.
The forecast shows that HMRC are expected to generate an extra ￡6billion in tax revenues, an increase of ￡4.6billion from 2021.
The rise comes as interest rates have soared and the Personal Savings Allowance has remained frozen for over nine years. The PSA allows basic rate taxpayers to earn up to ￡1,000 in savings interest tax-free, while higher rate taxpayers get just ￡500.
Additional rate taxpayers get no allowance at all and pay tax on all interest earned outside of tax-free wrappers like ISAs.
The revelation comes as the Chancellor aims to plug holes in the nation's finances (Image: Getty)
The figures show that the number of basic rate taxpayers facing savings tax will rise from 494,000 in 2022/23 to a projected 1.15 million by 2025/26 – more than doubling in just three years.
Meanwhile, the number of higher rate taxpayers affected will surge from 405,000 to 897,000 over the same period.
Ms Suter added: “The amount of income earned on savings has skyrocketed as interest rates have increased and tax bands have been frozen, creating a welcome windfall for the cash-strapped Treasury.
“Brits will earn around ￡20bn from non-ISA cash accounts this year, a more than fourfold increase over a five year period.
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“That boon for savers has turned into a bounty for the taxman. It expects to collect more than ￡6 billion when it takes its slice of the income earned by savers in the current tax year.”
A Treasury spokesperson said:"We are protecting the ￡20,000 tax-free yearly ISA savings limit, meaning the vast majority of people will continue to pay no tax on their savings.
“In addition, we are protecting payslips for working people by keeping our promise to not raise the basic, higher or additional rates of Income Tax, employee National Insurance or VAT. That’s the Plan for Change - protecting people’s incomes and putting money into people’s pockets."
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