Huge tax crackdown on saving accounts approved by Rachel Reeves – what it means for you
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RACHEL Reeves has approved a huge tax crackdown that will hit savers.
The chancellor's new rules mean banks could be forced to share more of their customers' financial details, as part of plans to make it easier for the Government to collect taxes.
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Rachel Reeves has been told she needs to find £50billion worth of revenue or cuts
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Under the plans, banks will need to ask new and existing customers with savings accounts for their National Insurance numbers from April 2027.
This will make it easier for HMRC to bill savers who have breached their personal savings allowance.
Most people have a personal savings allowance that lets them earn up to £1,000 in interest on their savings without paying any tax.
However higher-taxpayers have a lower allowance of £500 and additional-rate taxpayers don't get a tax-free allowance.
Read more on Rachel Reeves
POT LUCK State pension could rise by £478 next year for millions of households
Savers typically breach the personal allowance with just over £16,500 in savings, according to wealth firm The Private Office.
It's estimated 2.54million people will have to pay tax on their savings in the current tax year.
That's up from just 647,000 in the 2021/2022 tax year.
But HMRC has said it's unable to get hold of taxpayer data properly in about a fifth of cases - meaning there could be millions of pounds worth of tax that doesn't get collected.
The chancellor is hoping to boost Government funds after a report by the National Institute of Economic and Social Research (NIESR) suggested she must find £50billion worth of revenue or cuts.
The plans to require banks to share more customer information will be introduced in legislation next year.
What Does My Tax Code Mean? A Simple Guide to Your HMRC Letter
They would see more workers pay savings tax directly from their pay packets without submitting a self-assessment.
Customers applying for current accounts will not need to share extra data.
The Government admitted this would mean "significant costs" of approximately £35million.
Banks have also warned it could cost them as much as £10million to make the change, and that it could take years to implement.
Millions could be hit with unexpected tax bills
HMRC is expecting to collect more than £6billion in tax from savers this tax year.
In what's being dubbed a "tax by stealth", more people are being dragged into the tax net without any policy change.
More people are being forced to pay tax on their savings because interest rates have soared and the Personal Savings Allowance (PSA) has been frozen for over nine years.
Many won't realise they have breached their allowance until they see their pay packets decrease.
If you file a tax self-assessment then you will need to declare any interest earned, but for others HMRC will collect the data directly from your payslip by adjusting your tax code.
You should get a letter from HMRC if your tax code has been changed.
People are more likely to have breached the tax-free limit if they've moved their money to accounts with high interest rates.
Figures disclosed to AJ Bell suggest the average person is paying £2,300 in tax on their savings.
What you can do to avoid paying tax on your savings
If you want to avoid paying tax on your savings interest, the best way to shield your money is to put it into an ISA account.
These accounts let you save up to £20,000 per year without having to pay any tax on the interest you receive.
They're also a great option because they've got highly competitive interest rates.
There are five types of ISA: Cash ISA, Stocks and Shares, Lifetime ISA, IFISA and Junior ISA.
The most commonly used ones are Cash, Stocks and Shares and Lifetime ISAs.
A Cash ISA is very similar to a normal savings account, but with the added bonus of being able to save money tax-free.
Stocks and Shares ISAs allow you to invest into the stock market, so these are more risky but they can give greater returns if you're willing to keep your money locked away for longer.
Lifetime ISAs can be used if you're saving up for buying a home or for retirement.
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