Millions of Britons will be forced to pay tax on their savings this year as soaring numbers of workers are pulled into higher bands for the first time.
Rachel Reeves‘s decision to keep tax thresholds frozen means many workers receiving wage rises to help combat the cost-of-living crisis will be dragged into paying more tax.
In a double blow for many, higher interest rates will also mean around 3.4million people are expected to receive a bill for interest made on their savings in the current tax year, up from 3.1million five years ago.
Critics have urged the Chancellor to address the effects of the tax-threshold freeze – known as ‘fiscal drag’ – as bills go up without income increasing in real terms.
She is also facing mounting pressure to maintain the tax-free amount that savers are allowed to put into cash Isas.
The Chancellor is understood to have considered lowering the limit to encourage more people to invest in stocks and shares.
Harriet Guevara, chief savings officer at Nottingham Building Society (NBS), which studied the latest HMRC figures, said the data showed a ‘hidden tax burden for ordinary savers’.
She added: ‘At a time when families are trying to build financial resilience amid frozen thresholds and rising living costs, the Government should be doing more to reward and protect savers.’
Rachel Reeves’s decision to keep tax thresholds frozen means many workers receiving wage rises will be dragged into paying more tax (the Chancellor pictured in July during a visit to Imperial College London)
Ms Reeves reportedly considered cutting the tax-free allowance on cash Isas to encourage more people to invest in shares and boost the economy (Stock image)
Government rules allow people to earn some interest on their savings without paying tax.
A person earning less than £17,570 a year can receive up to £6,000 in savings interest tax-free. Basic-rate taxpayers earning between £17,571 and £50,270 have a savings allowance of £1,000.
For higher-rate taxpayers, earning up to £125,140, this falls to £500, while additional rate taxpayers over this level receive no tax-free allowance.
The allowances have been frozen for nine years, meaning many more people have been dragged into paying tax on savings interest as their incomes have risen in line with inflation.
The system is also considered incredibly complicated, which has resulted in many storing their money in Isas, which have a tax-free allowance of £20,000.
Ms Reeves reportedly considered cutting the tax-free allowance on cash Isas to encourage more people to invest in shares and boost the economy.
But an announcement on the limit was delayed last month following a backlash from building societies and savers.
The NBS assessment came as HMRC data compiled by the online investment platform AJ Bell showed that one in every 25 basic-rate taxpayer will receive a bill for interest on their savings this year compared to less than one in 100 four years ago.
While rising interest rates have boosted returns for savers, AJ Bell warns that this has now turned into a ‘bounty for the taxman’ as HMRC is expected to pocket more than £6billion from savers this year.
