The number of savers that face paying £5,000 or more in income tax on their savings interest will soar to 144,000 this financial year, a Freedom of Information request by Paragon Bank warns.
HMRC forecasts this huge number will pay a minimum of £5,000 in the 2026/7 tax year, a 173 per cent increase in just four years, the FOI reveals.
In 2022/23, just 52,700 individuals faced a tax bill above this amount.
Our analysis shows on a savings account paying 4 per cent, a big bill like this would require a basic-rate taxpayer to hold roughly £650,000 in savings.
For higher-rate taxpayers it is £325,000 and for additional-rate taxpayers it’s £277,500.
Basic-rate taxpayers have a Personal Savings Allowance of £1,000. Above this, they face 20 per cent tax on interest, depending on their circumstances.
Higher-rate taxpayers have a £500 buffer, when they then face 40 per cent tax on interest and additional-ratem payers have no buffer, and pay 45 per cent.
This becomes even less generous next year, when the rates rise to 22 per cent, 42 per cent and 47 per cent respectively.
Tax bill: More Britons are being caught out with big savings interest tax bills, triggered by big pots
You only pay tax on interest that exceeds your tax-free allowances, including the PSA, but also the personal allowance – usually at £12,570 – and the starting rate for savings, which is a special 0 per cent band that allows you to earn an additional £5,000 in interest tax-free, if you have no income elsewhere.
The figures highlight the importance of utilising Isas. Currently, £20,000 a year can go into the tax wrapper, in either cash, stocks and shares, or a blend of the two.
But from next year, the allowance for cash is cut to £12,000 for under 65s. You’ll still be able to use the full £20,000, but only if £8,000 goes into stocks and shares.
There are 1.1million instant access non-Isa savings accounts holding balances of £100,000 or more, with a combined value of nearly £261billion, Paragon analysis of CACI data shows.
It is likely some of these balances are generating hundreds, if not thousands, of pounds in tax, as they sit outside a tax-free wrapper.
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The data highlights how tax is becoming a growing issue for savers with larger balances, particularly at a time when many people are holding substantial sums in cash and looking to make the most of competitive rates.
Andrew Wright, head of savings at Paragon Bank, said: ‘These figures show tax on savings is no longer an issue affecting just a small number of people.
‘As balances have grown and rates have remained relatively high, far more savers are now finding themselves with substantial tax bills on their interest.
‘It is clear there are a lot of people with larger balances who may need to think carefully about how their money is structured.
‘Reviewing your savings regularly, checking the rate you are earning, and making use of tax-efficient options where appropriate can help ensure more of your return stays in your pocket.’
How does HMRC know if you owe tax?
Paragon Bank says HMRC receives information from banks of any interest paid and matches it to taxpayers.
For individuals subject to PAYE they will try to collect it through adjusting tax codes.
This involves estimating the current year position and truing up when it gets the information.
It says not all organisations that pay interest are obliged to report so some will be missed.
It adds that HMRC’s ability to match is not perfect, partly because collection of NI numbers by financial institutions is not yet mandatory.
However, there is a programme to improve the reporting of savings income by banks so much more is identified and correctly allocated.
It is a taxpayer’s responsibility to inform HMRC if any interest is missed.
The self-employed already fill in a tax return and will declare savings income in the tax return.
Pensioners with private pensions in addition to the state pension are within PAYE.
