HMRC tax bills averaging £2,300 set to hit thousands of UK savers

Thousands of households with savings accounts are set to receive tax demands from HM Revenue and Customs (HMRC) as rising interest rates push more savers beyond their tax-free allowances.

Financial analysts have calculated that savers are now handing over an average of 31 per cent of their interest earnings in tax once allowances are taken into account.

Laura Suter warned: "Falling foul of the savings tax trap can be costly.

"Figures disclosed to AJ Bell show the average person is paying £2,300 in tax on their savings, with an average effective rate of tax of about 31 per cent."

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The analysis from AJ Bell suggests the Treasury is set to receive a significant boost from savings taxation this year.

British savers are expected to generate around £20billion in interest from non-ISA accounts during the current financial year alone.

The rise in tax bills has been driven by a combination of higher interest rates and rising wages, both of which have increased the number of people exceeding the tax-free savings thresholds.

At the same time, the Personal Savings Allowance has remained frozen since it was introduced more than eight years ago.

Ms Suter said: "Labour has frozen tax thresholds and left the Personal Savings Allowance untouched since it was introduced more than eight years ago."

She added: "With interest rates rising sharply, more savers are being dragged into the tax net. What was once a tax affecting wealthier savers is now catching out everyday basic-rate taxpayers."

The result has been a fourfold increase in interest earned from non-ISA cash accounts over the past five years.

Current tax-free allowances vary depending on income levels and tax bands.

Basic-rate taxpayers can earn up to £1,000 in annual interest outside an ISA before paying tax on their savings.

Higher-rate taxpayers earning more than £50,270 see their allowance reduced to £500 a year.

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Additional-rate taxpayers earning £125,140 or more receive no Personal Savings Allowance at all, meaning all interest earned becomes taxable immediately.

ISAs continue to offer savers a way to shield money from tax, with up to £20,000 each year protected from tax liability.

Anyone exceeding their allowance could ultimately receive contact from HMRC regarding unpaid tax.

Ms Suter warned many savers who moved money into higher-paying accounts may not realise they have exceeded their allowance until later.

"Many won't realise they've breached their allowance until HMRC comes knocking," she said.

For workers paying tax through PAYE, HMRC usually recovers unpaid savings tax through adjustments to tax codes rather than issuing separate invoices.

Ms Suter said this could result in unexpected reductions to monthly pay packets.

"For those on PAYE, HMRC will collect the money directly from their payslip by adjusting their tax code. That can lead to a nasty surprise when people see their take-home pay suddenly fall," she added.

People who complete self-assessment tax returns are required to declare savings interest separately as part of the process.

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