More than 1.2m savers will be forced to pay tax on their interest for the first time this year as a stealth raid by Rishi Sunak brings in billions of pounds for the Treasury.
A record number of people are expected to be caught by the raid after Rishi Sunak froze income tax bands, meaning more people are dragged into the 40pc threshold as their wages increase.
Rising interest rates mean that returns on savings are also going up. Taxpayers in the higher rate bracket must pay 40p in tax on any interest they earn above £500.
The accountant RSM estimates 1.2m new people will face the savings tax in 2023, with many of them also forced to fill out a tax return for the first time as a result.
The figures are likely to cast doubt on Jeremy Hunt’s commitment to supporting savers after he criticised banks earlier this week for failing to pay high enough interest rates. The Chancellor suggested the Government was preparing to intervene in the market on customers’ behalf.
It came as the Resolution Foundation think tank suggested Mr Hunt should slash stamp duty and end a 60pc tax trap for higher earners.
The left-leaning think tank warned that the Chancellor and Prime Minister’s decision to freeze a series of tax thresholds for five years will cost every household the equivalent of £4,200 in extra taxes by 2027-28.
The personal savings allowance lets basic rate payers earn up to £1,000 in interest on their savings, and higher rate payers £500, before they are taxed.
These limits have not changed since they were introduced by former Chancellor George Osborne in 2016.
The tax cost savers £7.2bn last year alone, according to analysis for the Telegraph by the Centre for Economics and Business Research think tank, which estimates it will surge again to £7.6bn in 2023-24.
This is a significant increase on previous years. The tax raised £1.4bn in 2020-21.
Shaun Moore, of the investment company Quilter, said: “The era of ultra-low interest rates is in the back mirror for the time being and the government needs to modernise the tax system to appreciate this new environment.”
The average rate on an easy-access savings account is 2.36pc, according to data from financial analyst Moneyfacts, compared to 0.46pc this time last year. Meanwhile the top rate on a one-year fixed-rate bond is 5.8pc.
At last year’s average rate, a higher rate taxpayer would only pay tax on their savings if their nest egg was worth more than £108,000.
At today’s average rate, tax will kick in once they hold over £21,000 outside of a tax-free wrapper, such as an Individual Savings Account (Isa).
Additional rate taxpayers get no personal savings allowance. The threshold for the 45pc tax dropped from £150,000 to £125,140 in April this year, robbing 300,000 taxpayers of their £500 allowance and putting them at risk of an unexpected tax bill.
Separately, the Resolution Foundation described stamp duty on homes as a “bad tax” that distorts the housing market and called for the existing rate to be halved for main homes, a change that analysts said would reduce the average cost of moving by nearly £4,000.
It also urged Mr Hunt to remove a tax grab that means people earning over £100,000 pay an effective 60pc income tax rate up to £125,140, as their tax-free personal allowance is withdrawn.
However, the Foundation – whose chief executive Torsten Bell previously served as then-Labour leader Ed Miliband’s policy head – also recommended a series of politically unpopular tax hikes, including broadening the scope of inheritance tax to include pension pots and agricultural land and a raid of the self-employed.
Former pensions minister Ros Altmann has urged the Chancellor to increase the tax-free savings allowance so taxpayers can keep more of their hard-earned savings.
Maxwell Marlow of the Adam Smith Institute, a think tank, said the Government’s decision to maintain frozen tax thresholds has created a fiscal drag effect that is highly detrimental.
He said: “Instead of keeping up with inflation, the Treasury is intent on increasing medium-term household insecurity, reducing investment from savings, and ensuring people’s post-tax income goes less far.”
Tom Clougherty of the Centre for Policy Studies, a think tank, said there was a good argument for abolishing the tax on savings income altogether.
He added: “Cash savings are overwhelmingly made out of taxed income and shouldn’t be subject to another layer of tax.”
The Treasury was approached for comment.
Source: finance.yahoo.com