More than five million UK savings accounts are now at risk of being hit with a tax bill, prompting calls for savers to review their finances. The number of non-ISA savings accounts forecast to earn over £1,000 in interest has increased by 1,047% in the last eight years, according to new analysis by Yorkshire Building Society.
Sharp rise in taxable accounts
In January 2018, there were 462,000 accounts that would have earned more than £1,000 in interest and be potentially liable for tax. That figure has now risen to 5.3 million.
Basic-rate taxpayers can earn up to £1,000 in savings interest each tax year before they start to pay tax on the interest earned. Higher rate taxpayers can earn up to £500, while additional rate taxpayers do not receive any allowance. Any interest earned above these limits is taxed at your usual income tax rate.
Impact of frozen thresholds
Inflation, a higher interest rate environment and frozen tax-thresholds have contributed to millions more being liable to pay tax on their savings interest. The personal savings allowance was introduced in April 2016, when the majority of easy access accounts paid 1% or less. Now the majority pay 3% or more.
This means that in 2016 basic-rate taxpayers would have been able to put away £100,000 in a typical savings account. In 2026, savers would only be able to save around £25,000 at rates of 4% without breaching their allowance.
Experts call for reform
Tina Hughes, Director of Savings at Yorkshire Building Society, said: “People doing the responsible thing — saving for a home, for emergencies or for the future — are now being punished by outdated rules. The Personal Savings Allowance urgently needs reform so it keeps pace with reality and supports savers, rather than catching them out.”
Rachel Springall, Finance Expert at Moneyfacts, said: “Savers are earning higher rates of interest, but they are also becoming ever more exposed to tax due to fiscal drag. The fact that there are millions of accounts becoming liable to tax over the past five years alone just shows how the Personal Savings Allowance has not moved on with the times and is in dire need of review to protect savers.”
Savers at risk of paying tax on their savings interest could choose to put money into an ISA account, where any interest earned is free from tax. Up to £20,000 a year can be put into one ISA account or across different accounts.
