Millions of Brits will face a ‘hidden tax burden’ this year, fresh HMRC data has revealed, as thousands more are set to pay tax on the interest from their savings.
Over 3.35m people are projected to be taxed on savings interest in 2025 – where the interest earned on savings exceeds the tax-free allowance and becomes liable for income tax. This marks a sharp jump from just over three million in 2021.
The figures, revealed in a Freedom of Information request by Nottingham Building Society, come as Brits feel the sting of fiscal drag caused by frozen tax thresholds.
During Jeremy Hunt’s Chancellorship in 2022, he extended the freeze on income thresholds to 2028 meaning millions more taxpayers would be dragged into higher bands despite only modest increases in their income.
Whilst Prime Minister Sir Keir Starmer has promised to not hike income tax, he has refused to rule out extending the freeze – often subbed a “stealth tax”.
Nearly 40m people are projected to be paying income tax in the 2025 to 2026 period – a steep jump from 34.5m in the 2022 to 2023 period.
The Office for Budget Responsibility (OBR) estimates income tax will raise over £330bn for the 2025 to 2026 period.
Government must ‘protect’ savers
Harriet Guevara, chief savings officer at Nottingham Building Society, said the fresh tax on interest figures “highlight a growing and often hidden tax burden on ordinary savers”.
“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,” Guevara said.
She pointed to the potential cash ISA reform as the “wrong way” to drive the government’s mission for economic growth and bolstered investment.
“Reform should focus on simplifying and strengthening it, not introducing new barriers or caps,” she added.
The Chancellor put reforms to cash ISAs ‘on hold’ after facing fierce opposition top banks and building societies.
Current rules allow savers to put up to £20,000 into a cash ISA to protect the returns from being taxed but the Treasury was thought to be mulling reducing the allowance in a bid to drive investment into stocks and shares.
The Building Society Association (BSA) warned a reduction could derail Labour’s homebuilding ambition through having a “knock-on effect of making loans to households and businesses more expensive and harder to come by”