Warning for 2.6million people facing sudden pay cuts due to ‘tax trap' – can you avoid it?
New data has revealed 2.64million 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.
HMRC is expecting to collect more than £6billion in tax from savers - and it means the taxman will adjust tax codes to collect it from workers' payslips.
This could lead to a nasty surprise for those who don't realise they owe tax.
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.
The PSA lets basic rate taxpayers earn up to £1,000 in savings interest tax-free.
Higher rate taxpayers get £500 tax-free, while additional rate taxpayers don't get an allowance at all.
The Freedom of Information figures, obtained by investment platform AJ Bell, found the number of basic rate taxpayers expected to pay savings tax this financial year will balloon to 1.5million.
This is up from 494,000 in the 2022/tax year - meaning the number of basic rate taxpayers being forced to pay has more than doubled in just three years.
The number of higher rate taxpayers affected will surge from 405,000 to an estimated 897,000.
Laura Suter, director of personal finance at AJ Bell, said: 'With interest rates rising sharply, more savers are being dragged into the tax net without any policy change – it's tax by stealth.
Martin Lewis issues reminder to anyone born between 1984 and 2006 as they can get £1,000 free
'What was once a tax affecting wealthier savers is now catching out everyday basic rate taxpayers.
'Many won't realise they've breached their allowance until HMRC comes knocking.'
Some savers could end up paying a significant amount in tax as a result.
Figures disclosed to AJ Bell suggest the average person is paying £2,300 in tax on their savings.
People are more likely to have breached the tax-free limit if they've moved their money to accounts with high interest rates.
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.
It can mean that you see your take-home pay unexpectedly fall.
You should get a letter from HMRC if your tax code has been changed.
It will be a P800 form which tells you the taxman is adjusting your code to make up for any tax owed.
How do I check my tax code?
YOU can check your tax code on your personal tax account online, on any payslips or on the HMRC app.
To log in, visit www.gov.uk/personal-tax-account.
If you have one, you can also check it on a "Tax Code Notice" letter from HMRC.
Bear in mind that you might need your Government Gateway ID and password to hand to log in.
But if you don't have this you can use your National Insurance number or postcode and two of the following:
A valid UK passport
A UK photocard driving licence issued by the DVLA (or DVA in Northern Ireland)
A payslip from the last three months or a P60 from your employer for the last tax year
Details of a tax credit claim if you have made one
Details from a self assessment tax return (in the last two years) if you made one
Information held on your credit record if you have one (such as loans, credit cards or mortgages)
What you can do to avoid paying tax on your savings
The best way to shield your money is to put your savings 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.
ISAs have recently had highly competitive interest rates so this is a great option if you need to save away some cash.
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.
Like other savings accounts, you can opt for either easy-access or fixed.
Easy access accounts let you take out your money without paying a penalty, but the rate you get is likely to change.
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.
These give you a 25% Government bonus on top of your savings per year.
However it's worth noting you'll lose your bonus (and some of the cash you saved) if you withdraw your money for any reason other than retirement or buying a house.
Top tips for becoming an ISA millionaire
SAVING into a stocks and shares ISA can help you build wealth faster over the long term than cash savings. Dan Coatsworth, investment analyst at savings platform AJ Bell, gives his advice...
Start as early as you can
Time in the market is important, not just so you can ride the market ups and downs but also to let your wealth build up.
Not everyone can afford to invest the full £20,000 ISA allowance each year, particularly younger people who might be on a lower salary.
The trick is to start as early as possible with what you can afford to invest. Increase your contributions as you get older, such as when you get a pay rise.
Maximise your contributions
Try and invest as much as you can each month once you're sure all the essentials are covered.
Create a budget so you can pay bills in full and clear any expensive debt, such as personal loans or credit cards.
The remaining money can be used to fund your lifestyle and to top up your ISA.
Be consistent with contributions
Feeding your account on a regular basis means you get into the habit of squirrelling money away for your future.
After a while you get accustomed to that money going into your ISA that you may not even think about alternative uses for it, such as going shopping or down the pub with your friends.
Keep an eye on costs and charges
Costs can add up over time and eat into your returns. Try not to fiddle too much with your portfolio as trading in and out of investments incurs transaction charges.
It is important to be patient with investing, especially for someone hoping to be an ISA millionaire as the journey to build up this wealth could last for decades.
Spread your risks
Having a diversified portfolio is good practice for any investor and essentially means keeping different types of investments to help balance out the risk.
Then if something goes wrong with one of your investments, you've got the rest to hopefully act as a cushion to minimise the pain.
Diversification can involve investing in different industry sectors, geographies and asset types. For example, a diversified portfolio might have exposure to shares, funds and bonds from around the world.
Reinvest dividends
Companies and funds often pay dividends every three to six months.
Think of these as rewards for taking the risk of owning their shares or fund units. While it can be tempting to pocket that income stream to spend on yourself, history suggests one of the biggest contributors to investment returns is reinvesting dividends back into your account to grow wealth faster.
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