Nearly 3m savers will be hit by tax bill this year as more fall into the net

Around 120,000 more savers are set to pay tax on their savings interest in the space of a year, new data suggests.

A total of 2.64million people will be hit with a savings tax bill in the 2025/26 financial year, a Freedom of Information request to HMRC shows. In 2024/25 the number of people paying savings tax was estimated at 2.52million.

It means the number of people paying tax on their savings income is set to quadruple in just four years. In 2021/22 the number of people paying savings tax was 647,000.

The number of basic rate taxpayers paying savings tax will rise from 494,000 in 2022/23 to a projected 1.15 million by 2025/26 – more than doubling in just three years. 

Meanwhile, the number of higher rate taxpayers affected will surge from 405,000 to 897,000 over the same period.

The data show HMRC is handing more tax bills on savings interest than previously forecast.

An FOI request was submitted by AJ Bell last year and showed HMRC at the time projected 2.1million savers would be taxed in 2024/25, but the estimate has since risen over 25 per cent to 2.52million. 

HMRC expects to rake in more than £6billion in savings tax from savers in the current tax year.

For this financial year, it is likely one in 25 basic-rate taxpayers will pay tax on their savings, up from fewer than one in 100 four years ago.

And one in eight higher-rate taxpayers will be handing over some of their savings interest to HMRC – a jump from the 1 in 25 that were four years ago. 

On top of that, 45 per cent of all additional-rate taxpayers pay tax on their savings interest

This is because interest rates have soared and the Personal Savings Allowance (PSA) has remained frozen for over nine years.

Savers all have a personal savings allowance, which means they can earn £1,000 or £500 of interest tax-free, for basic and higher rate taxpayers, respectively. 

Additional rate taxpayers pay tax on all their interest.

But as interest rates have shot up over the last two years, savers who have diligently built even modest nest eggs are now getting stung.

Laura Suter, director of personal finance at AJ Bell says: ‘It’s tax by stealth.’

The average person is now paying £2,300 in tax on their savings according to AJ Bell, with an average effective rate of tax of about 31 per cent – although tax is charged at the individual’s marginal rate of either 20 per cent, 40 per cent or 45 per cent, the average rate of tax indicates the typical percentage sent to the taxman once tax-free allowances have been factored in.

HMRC expects to rake in more than £6billion in savings tax from savers in the current tax year. 

However there may be hundreds of millions of pounds in savings tax slipping through the net, as HRMC says it cannot reconcile bank account interest with taxpayer data in around a fifth of cases.

How will HMRC notify you 

Notification that your tax code has been changed will often arrive in the form of an HMRC envelope landing on your doorstep. 

A ‘P800’ form will tell you if your tax code is changing, which allows HMRC to collect a little more tax from your payslip to make up for anything owed. 

The higher-than-expected volume of people paying tax on savings interest prompted HMRC to issue a warning earlier this year that the letters may not be dispatched until March, just weeks before the start of the new tax year.

There can be a time lag of up to 14 months between the payment of interest by a savings provider and the reporting to the payment to HMRC. 

Laura Suter says: ‘HMRC makes its calculations based on data it receives from banks and building societies covering accounts held by tens of millions of taxpayers. 

‘The taxman then has to match the banks’ records – which are transferred, quite literally, in a spreadsheet – against its own income tax data to work out who it needs to collect more tax from.’ 

What can you do to shield your savings?

Individual Savings Accounts (Isas) are much like any other type of cash savings account, except your money is completely sheltered from tax.

You can put up to £20,000 into Isas every tax year. Isas tend to pay slightly lower rates than other savings accounts.

The current best-buy rate is 5.44 per cent on an easy access Isa from CMC Invest, a 4.3 per cent one year fix with Cynergy Bank and a 4.2 per cent two-year fix also offered by Cynergy Bank. 

Laura Suter says: ‘Using tax wrappers like cash Isas or investment Isas is now more important than ever to protect your savings from the taxman.’

Read more: The best stocks and shares Isas

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