Warning for higher rate taxpayers with more than £14,500 saved
Record numbers of people have been pulled into the higher tax band, which means their tax-free savings allowance is slashed - and they will lose 40 per cent of interest above it to tax.
The number of higher rate tax payers is set to balloon to more than 7million as thresholds remain frozen, figures from HMRC show.
Half a million tax payers have been dragged into the 40 per cent tax bracket in the past year alone, and higher rate payers now account for almost a fifth of all tax payers.
With the average easy-access account now paying 3.53 per cent, it means higher rate-taxpayers with more than around £14,500 in savings would breach their tax-free savings allowance this tax year, according to rates scrutineer Moneyfacts Compare.
The personal savings allowance allows savers to earn up to £1,000 of interest tax-free. But this is only for basic rate taxpayers, higher rate tax payers see it halved to just £500 and additional rate tax payers have no tax-free allowance at all.
> How the personal savings allowance and savings tax work
HMRC expects to collect £6.1billion in tax on savings in the 2025/26 tax year. Of this around £1.3billion is expected to arrive from higher rate tax payers.
Additional rate taxpayers, meanwhile, are expected to foot 70 per cent of the bill paid in savings tax at £4.2billion.
Adam French, consumer expert at rates scrutineer Moneyfacts Compare says: 'The latest statistics from HMRC show how important it is for savers to be aware of their tax liability.
'Especially many of those who have fallen into paying the higher-rate tax of 40 per cent, whose personal savings allowance has been halved from £1,000 to £500 as a result.'
How to beat the savings interest tax trap
If you are keeping your savings in cash, an Isa will help you avoid a tax bill on the interest.
An Isa is a tax-wrapper that allows you to salt away up to £20,000 in each tax year into savings or investments, with all returns then completely tax-free.
Savers have cottoned on to this fact while interest rates have been high and the savings allowance threshold has been frozen, meaning Isas have had record amount of cash flooding into them.
In April this year alone - the start of the new tax year - a record £14billion flooded into cash Isas.
This was the highest figure for any month since Isas were introduced in 1999.
And it does have an impact when it comes to taking the sting out of a tax bill, which can be seen in the latest HMRC figures.
The nation's savings tax bill was dramatically lower last year than the Government had initially predicted.
Last year HMRC forecast we would pay £10.4billion in tax on our savings in 2024-25, but this has now revised that down by a whopping £4.5billion to just shy of £6billion.
Laura Suter, director of personal finance at AJ Bell said: 'This is likely down to two factors: interest rates not staying as high for as long as initially expected, and more people sheltering their savings from His Majesty's Revenue and Customs in tax-free Isas.
'We've seen record cash Isa usage in the past couple of years, as people are aware that they will be hit with tax on their savings.'
Adam French added: 'Plenty of savers can avoid this tax bill by making use their yearly Isa allowances, with cash Isas keeping the savings of millions of people free from tax.'
Five of the best cash Isas
Products featured are independently selected by This is Money's specialist journalists. If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.
A cash Isa is an essential account for savers that protects you from tax on your interest.
This means that your pot can grow without tax dragging it back - something that is especially important for the growing number of 40 per cent taxpayers.
This is Money's savings experts scour the market for the real best cash Isa deals - looking for top rates and accounts that come without catches to trip you up.
Below you can find a run down of our top deals and you can check all the best cash Isa rates in our savings tables.
CMC Invest* easy-access - 5.44% (0.85% bonus for 3 months)
- Facts: £1 to open, no limit on withdrawals, short bonus
- Transfers in: Yes
- Flexible: Yes
Trading 212* - easy access - 4.92% with this link
- Facts: £1 to open, no limit on withdrawals, 0.73% bonus for 12 months
- Transfers in: Yes (but won't get bonus rate)
- Flexible: Yes
Chip easy access* - 5.00% (0.94% bonus rate for 3 months)
- Facts: £1 to open, limited to three withdrawals a year, short bonus
- Transfers in: Yes
- Flexible: No
Cynergy Bank one-year fix - 4.35%
- Facts: £1,000 to open
- Transfers in: Yes
- Flexible: No
Cynergy Bank two-year fix - 4.25%
- Facts: £1,000 to open
- Transfers in: Yes
- Flexible: No
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