Nearly a million extra savers face shock tax bills
Almost 1m more savers could be hit with shock tax bills this year, Shawbrook Bank has warned – unless they keep their cash in an ISA.
More than 6m savers will pay tax on interest in 2025, up 800,000 from the number of savers who had to pay tax on interest last year.
This is due to higher interest rates and fiscal drag, which have combined to drag more savers’ income above the personal savings allowance (PSA).
Shawbrook Bank said the “unexpected pitfall” could erode the interest of unwary savers.
Personal savings allowance
The PSA lets basic rate taxpayers earn a maximum of £1,000 a year in savings interest before paying income tax at their nominal tax rate.
For basic-rate taxpayers earning between £17,571 and £50,270, the PSA is £1,000. Anything over that level is taxed at 20 per cent.
Higher-rate taxpayers who earn between £50,271 and £125,140 can earn £500 in interest before paying tax at 40 per cent.
Additional-rate taxpayers (earning above £125,140 a year) get no PSA and pay tax at 45 per cent on all savings interest.
However, these figures do not include ISAs, where any interest earned is not eligible for tax.
Adam Thrower, head of savings at Shawbrook, said: “In the past, tax on savings was something that not many needed to think about due to the low interest rates on offer.
“However, with higher rates now available, many savers could encounter an unexpected pitfall that eats into their hard-earned interest.
“For savers wanting to take advantage of the higher rates on offer while protecting hard-earned cash from tax, ISAs might be worth considering.”
Top cash ISA rates
The top cash ISA rate is currently 5.1 per cent, from Trading 212. The deal has a 0.2 per cent bonus for 12 months, with no upper limit on what can be saved.
The only other cash ISAs paying more than 5 per cent interest are from Plum, paying 5.06 per cent, and Moneybox, which pays 5 per cent.
Any cash held in a savings deal above £85,000 will not be protected by the Financial Services Compensation Scheme in the event of the savings provider going bust.
The former Conservative government froze income tax thresholds until 2028. Labour has vowed to unfreeze the thresholds towards the end of the decade.
According to the Office for Budget Responsibility, an extra 3.2m people will end up in higher or additional-rate tax brackets by 2028-29 as a result of fiscal drag.