Around two million people will be taxed on their savings this year, with a tenth of higher rate taxpayers already doing so, according to a Freedom of Information request by AJ Bell.
Of those paying tax on their savings this year, over a million will be 20% basic rate taxpayers, which is double the number who did so in the 2022/23 financial year.
Due to the Personal Savings Allowance, more people will hit the £1,000 threshold of interest after the boom in interest rates offered by providers over the last three years.
This was due to the Bank of England base rate rising 14 consecutive times from December 2021, as the Monetary Policy Committee looked to rally the economy against skyrocketing inflation levels which hit an 11.1% peak in October 2022.
As the base rate was cut in August by 0.25% to 5%, interest rates have followed suit in the same direction of travel.
Wellness and wellbeing holidays: Travel insurance is essential for your peace of mind
Out of the pandemic lockdowns, there’s a greater emphasis on wellbeing and wellness, with
Sponsored by Post Office
In September, the average rate on easy access savings accounts dropped by its biggest margin for five months, falling from 4.3% to 4.23%, Moneyfacts data found.
While it’s the same case for ISA rates – which fell from 3.36% to 3.29% month-on-month – savers locked into an ISA can earn up to £20,000 before tax has to be paid.
So, savers whose interest is creeping past the £1,000 barrier have been making the switch to cash ISAs.
Indeed, the amount held in cash ISAs in the first half of 2024 rose by £42bn as customers opted to store more cash in fixed-rate ISAs, as opposed to easy access, notice and regular saver accounts, for the first time since November 2021.
Laura Suter, director of personal finance at AJ Bell, said: “Previously the majority of people didn’t need to worry about paying tax on their savings, as interest rates were low and the Personal Savings Allowance was sufficient to cover most people.
“But now a tricky combination of interest rates rising, cash ISAs being shunned for decades, more people moving into higher tax brackets and seeing their Personal Savings Allowance cut, and the tax-free allowance being frozen means lots of people are being dragged into the tax.”
Suter added: “Previously savers often had to make a decision between getting the highest interest rate with a non-ISA account and using a cash ISA, but ISA rates have more closely matched standard savings rates in recent years, removing one of the barriers to using an ISA.
“However, another reason for the drop in the figures could be that lots of cash savers are still apathetic when it comes to their savings. Despite interest rates having soared many people have left their money sitting in old savings accounts earning very little or no interest.”
