More than 1.2million savers will be forced to pay tax on their interest for the first time this year as a stealth crackdown by Rishi Sunak nets the Treasury billions of pounds.
A record number of people are expected to be raided after Rishi Sunak froze income tax margins, meaning more people will be sucked into the 40 percent limit as wages rise.
Rising interest rates mean that savings yields also rise. Taxpayers in the higher tax bracket have to pay 40p tax on all interest earned over £500.
Accounting firm RSM estimates that 1.2 million new people will face savings tax in 2023, many of whom will also have to file tax returns for the first time.
The figures are likely to cast doubt on Jeremy Hunt's commitment to helping savers after earlier this week criticized banks for not paying high enough interest rates. The Chancellor hinted that the government was preparing to intervene in the market on behalf of customers.
This comes as the Resolution Foundation think tank proposed Mr Hunt to cut stamp duty and end the 60 percent tax trap for high earners.
The left-leaning think-tank warned that the Chancellor and Prime Minister's decision to freeze a range of tax thresholds for five years will cost each household the equivalent of £4,200 in additional taxes by 2027/28.
The Personal Savings Allowance allows base rate payers to earn up to £1,000 in interest on their savings and higher rate payers pay £500 before being taxed.
These limits have not changed since they were introduced by former Chancellor George Osborne in 2016.
The tax saved £7.2 billion in tax bills last year alone, and estimates they will rise again to £7.6 billion in 2023-2024, according to an analysis by the think tanks Center for Economics and Business Research for the Telegraph becomes.
This is a significant increase compared to previous years. The tax raised £1.4 billion in 2020–21.
Shaun Moore of investment firm Quilter said: “The era of ultra-low interest rates is on the back burner for now and the government needs to modernize the tax system to appreciate this new environment.”
The average interest rate on an accessible savings account is 2.36 percent, according to data from financial analyst Moneyfacts, compared with 0.46 percent this time last year. The maximum interest rate for a one-year fixed-interest bond is now 5.8 percent.
At last year's average tax rate, a higher taxpayer would only pay tax on their savings if their nest egg was worth more than £108,000.
At today's average rate, once you earn more than £21,000 outside a tax-free envelope, such as a home, tax becomes due. B. an individual savings account (Isa).
Taxpayers with an additional tax rate do not receive a personal savings allowance. The threshold for the 45 per cent tax fell from £150,000 to £125,140 in April this year, stripping 300,000 taxpayers of their £500 allowance and leaving them at risk of an unexpected tax bill.
Separately, the Resolution Foundation called stamp duty on homes a “bad tax” that distorts the property market and called for the existing primary residence tax rate to be halved, a change analysts say would cut the average cost of a move by nearly £4,000.
It also asked Mr Hunt to reverse a tax increase that means people earning more than £100,000 pay an effective income tax rate of 60 per cent up to £125,140, as their tax-free personal allowance is abolished.
However, the foundation – whose chief executive Torsten Bell previously served as political director for then-Labour leader Ed Miliband – also recommended a series of politically unpopular tax hikes, including extending inheritance taxes to pension funds and farmland, and cracking down on the self-employed.
Former Pensions Secretary 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 keep the tax thresholds frozen had resulted in a highly damaging tax effect.
He said: “Rather than keeping pace with inflation, the Treasury is keen to increase medium-term household uncertainty, reduce investment from savings and ensure people's after-tax income falls less sharply.”
Tom Clougherty of the Center for Policy Studies, a think tank, said there was a good case for eliminating the tax on interest income altogether.
He added, “Cash savings are primarily derived from taxed income and should not be subject to any other level of taxation.”
The Treasury Department has been asked for comment.
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