High earners only need £10k in savings to fall into tax trap

Telegraph

2 days ago

Higher-rate taxpayers need only £10,000 in savings to attract a tax bill, down from £77,000 four years ago, analysis shows.
Frozen tax thresholds and higher interest rates mean those earning more than £50,270 trigger a tax bill if they hold savings above £9,800, according to AJ Bell.
The amount basic rate payers require before incurring tax on their savings has fallen by more than £130,000, from £154,000 in 2021 to £19,600 today.
Savings tax is paid on interest earned over the personal savings threshold. This means a basic rate taxpayer who has £20,000 in a savings account with a 5pc interest rate would be liable for a bill.
It comes after HMRC figures revealed more than 2.6 million taxpayers are expected to be hit with bills on their savings this year. In the 2025-26 tax year, 2.64 million savers will face a tax bill, up by over 120,000 from 2.52 million last year.
It means HMRC is forecast to rake in more than £6bn from savers. This is up from £1.4bn in 2020-21 when just 800,000 were hit with a tax bill.
The personal savings allowance was introduced in April 2016 to help encourage the nation to save. It allows basic rate taxpayers, those earning up to £50,270 a year, to earn up to £1,000 of interest tax-free.
For higher-rate taxpayers, who earn between £50,270 and £125,140 annually, the allowance falls to £500. Additional-rate taxpayers have no allowance, and must pay a tax rate of 45pc on any interest their savings accrue.
However, since the personal savings allowance was launched by former chancellor George Osborne more than nine years ago, the allowance has remained frozen.
Analysis by AJ Bell shows that in December 2021 when the top easy-access account paid 0.65pc in interest, a higher-rate taxpayer could save £77,000 before exceeding their allowance. For a basic rate taxpayer, the figure was £154,000.
Today's top easy-access rate is 5.1pc, according to Moneyfacts, meaning a higher-rate taxpayer would be taxed on savings above £9,800, and a basic-rate taxpayer would face bills on savings over £19,600.
Laura Suter, director of personal finance at AJ Bell, said: 'Many won't realise that even having relatively modest sums in their savings accounts could land them with a tax bill.
'Older savers who are nearing retirement are particularly at risk of an unwanted tax bill for their cash savings.
'Many will have built up large cash reserves to spend in retirement – not wanting to take a risk with the money by investing it so close to their retirement date.
'If these cash piles are outside an Isa wrapper, they could face chunky tax bills for the money.'
More taxpayers could be dragged into paying tax on their savings as Chancellor Rachel Reeves continues to flirt with cutting the cash Isa allowance.
Although Ms Reeves did not use her Mansion House speech last month to cut the £20,000 annual allowance as some experts had feared, she did leave the door open to 'further changes'.
Ms Reeves said she 'would consider further changes to Isas' over the 'coming months', leading to speculation she could announce reforms at the Budget later this year.