Over 1 million savers have been hit by tax on savings

Over 1 million savers have been hit by tax on savings

HMRC is writing to taxpayers to tell them their savings will incur tax, which is an annual activity and is part of their mission to ‘help people’ to pay the right amount of tax.

Now the 2023-24 tax year is closed with self assessment finalised, HMRC has been able to review the full savings tax liability situation, and as it receives data from the banks and building societies detailing the amount of interest paid to their individual account holders it knows of any discrepancies and have advised that the letters are likely to be sent to thousands of taxpayers.

HMRC have stressed: ‘It’s an individual’s responsibility to ensure they pay the correct tax, and they should let us know as soon as possible if they believe they haven’t. It is our duty to collect taxes to fund public services.’

The latest figures from HMRC show that a total of 1.17m taxpayers already have income tax liabilities on savings income for the 2022-23 year.

In addition, over 500,000 basic rate taxpayers are already paying tax on their savings interest, having exceeded the £1,000 personal savings allowance (PSA). These more than half a million individuals would have faced tax charges for tax year 2022-23.

This rose to 344,000 for higher rate taxpayers who can only earn £500 interest tax free a year, a threshold which has remained frozen since it was first introduced in April 2016. This affects anyone earning over £50,270.

For top earners facing the additional rate of tax of 45%, there is a zero personal savings allowance, which means all saving interest is taxable.

However, it has also been suggested that the number of basic rate taxpayers being hit with the tax will near 1 million people, up from just half a million in 2022-23.

One of the issues with this is that lots of people won’t realise they owe tax until a brown letter from HMRC lands on their doormat. While those filling out a self assessment tax return will declare any savings interest, and subsequent tax due, those taxed under PAYE get any tax liability calculated by HMRC, based on information sent to them by banks and building societies. This will often mean that their tax code is adjusted, and they repay the tax through their payslip each month!

When the PSA was first announced by then chancellor George Osborne in March 2015, the £500 and £1,000 figures seemed generous, with interest rates extremely low and at that time, tax experts commented that ‘very few people will be affected by this as they simply won’t be earning enough interest. This will only affect the highest earners’.