More than two million pensioners could end up paying tax on their savings in the near future, according to HMRC figures.
Pensioners have been warned that they could be pushed into paying tax as freezes remain in place. HMRC numbers show that the number of pensioners set to pay tax on their savings will exceed two million for the first time. This would be four times the current amount, as interest rates rise and allowances remain frozen.
Rising interest rates and frozen allowances
A finance expert said that it is a drawback of rising interest rates, with savings providers paying well above the Bank of England's base rate. The data released by HMRC shows that the number of people over the age of 65 expected to pay tax on interest earned from their savings is projected to rise from 517,000 in 2022-23 to 2.1 million in 2026-27.
It comes as the government has decided to keep the frozen tax threshold, which allows basic-rate taxpayers to keep an additional £1,000 in savings interest from HMRC each year on top of the £12,570 income tax personal allowance.
Impact on pensioners with savings
This means that pensioners who have £30,000 in savings in an account with an interest rate of at least 4.5%, their £1,350 earnings would breach the allowance by £350, reports The Independent. The number would then be added to their other income sources, such as the state pension, to determine how much tax they owe to HMRC.
While increased interest rates are generally good news for savers, they can be a double-edged sword, says Andrew Wright, head of savings at Paragon Bank.
"The personal savings allowance has remained unchanged, so more people are being pulled into the tax net as their incomes and savings interest rise," he told The Telegraph.
"Higher interest rates have been positive for savers, helping them earn more on their money, but they have also increased the likelihood of breaching the allowance."
Projected tax revenue
If the number of pensioners with taxable savings income reaches the projected 2.1 million mark, over-65s are expected to make up almost half of UK adults who have to pay tax on these kinds of earnings. It is expected to mean more than £3.34bn earned by the government in 2026-27.
"With savings often providing vital financial security later in life, it is important to regularly review where your money is held," Wright added. "Making full use of your ISA allowance can help protect more of your hard-earned interest from tax, and those aged 65+ have the benefit of retaining the full £20,000 cash ISA allowance from next tax year."
