Taxpayers face the prospect of heavy tax bill on their savings: How can you protect your money?
As the Government attempts to balance its books, HM Revenue and Customs (HMRC) has revealed over 2.6 million taxpayers will be hit with tax bills on their savings.
It is estimated during the 2025/26 tax year, over 2.64 million savers will face a tax bill, an increase of over 120,000 in the previous year.
According to a report, the average saver is paying a £2,300 tax bill for interest occurred on their savings this year.
HMRC has estimated it will collect over £6 billion from savers. The figures are concerning for savers and taxpayers as the current economic climate put their savings at risk.
If you want to protect your savings, it is important to explore the options available and speak with finance and tax experts.
How does savings tax work?
Savings tax is paid on interest occurred. You become liable when you are pushed over the personal savings threshold. It is charged at the taxpayers’ income tax rate.
The personal savings allowance may allow you up to £1,000 of interest tax-free depending on the income tax band you are in. The more you earn, the smaller the allowance and individuals earning £125,140 or more do not benefit.
There are several forms of savings that are taxable including current account interest, savings account interest, interest from peer-to-peer lending, Government bonds and credit union occurred savings interest.
You need to understand the importance of checking your savings and examining the interest involved because you could be a risk of pushing into a threshold where a tax bill could come your way.
Why are more savers paying tax?
The two main factors behind the increased number of savers paying tax are the continued frozen tax thresholds and higher interest rates.
With Income Tax currently frozen until 2028, as individuals earn more and save more, they are being pushed into higher tax brackets, making their savings liable for tax.
The upcoming Autumn Budget could see the Income Tax threshold extended as Chancellor Rachel Reeves tries to balance the Government’s books although at this stage, it remains speculative.
Higher interest rates are also pushing savers beyond the threshold. Interest rates in the UK currently sit at 4.25 per cent, double the Government’s 2 per cent target. Interest rates have been climbing since January 2022, and while interest rates are decreasing slowly, they are still extremely high.
The Bank of England monitors interest rates in the UK and will decide if cuts or increases are required. They have been holding and making modest cuts over the last months but not enough to stop the increase in savers paying more tax.
Bank of England officials meet this week to discuss interest rates where it is expected to be cut further but not enough to stem the tide as despite the cuts, they are still way above where the Government wants it to be.
How can I protect my savings?
You can protect your hard-earned savings in multiple ways to limit the damage of a tax bill. Being proactive gives you the best opportunity to protect your savings and lower the chances of paying a bill.
A useful way to protect your savings is to open a tax-free ISA. You can earn tax-free interest on up to £20,000 of savings through an ISA each year. Opening an ISA is a good avenue especially if you feel you will exceed the limit.
Another option is to monitor savings interest rates. These will fluctuate and could affect your savings. This wouldn’t apply if you have a fixed-rate account as your interest has already been agreed with the account provider.
It is also advisable to check when interest is paid as this can vary. Some may pay monthly, annually or when the account reaches the end of a fixed-rate term. Spreading the payments can help keep your returns below the personal savings allowance.
Is there support available?
You want to protect as much of your savings as possible and ensure you are not hit with an unwanted tax bill.
If you are concerned about your savings and the potential of a savings tax bill, you should speak with finance experts who can help you understand the current legislation in place, if you are at risk of a bill and advise the best steps to take.
Worried about your savings? Reach out to our team for sound and tailored advice and support.
