HMRC £2,300 tax charge for UK households with savings | Personal Finance | Finance

HMRC is set to send out tax charges worth an average of £2,300 for households with savings. The latest figures from financial experts show that the average person with savings is now paying £2,300 a year in tax, even after tax-free savings allowances have been accounted for.

In August, Laura Suter, Director of Personal Finance at AJ Bell, explained how ‘falling foul of the savings tax trap can be costly’. She said: “Figures disclosed to AJ Bell show the average person is paying £2,300 in tax on their savings, with an average effective rate of tax of about 31% – although tax is charged at the individual’s marginal rate of either 20%, 40% or 45%, the average rate of tax indicates the typical percentage sent to the taxman once tax-free allowances have been factored in.

“The amount of income earned on savings has skyrocketed as interest rates have increased and tax bands have been frozen, creating a welcome windfall for the cash-strapped Treasury. Brits will earn around £20bn interest from non-ISA cash accounts this year, a more than fourfold increase over a five-year period.”

Part of the reason for the increase in tax on savings is that interest rates have risen in recent years, as have wages, but the Personal Savings Allowance – the amount of interest you can earn on savings in a given tax year – has been kept the same.

Ms Suter adds: “The government has frozen tax thresholds and left the Personal Savings Allowance untouched since it was introduced more than eight years ago. With interest rates rising sharply, more savers are being dragged into the tax net. What was once a tax affecting wealthier savers is now catching out everyday basic-rate taxpayers. Many won’t realise they’ve breached their allowance until HMRC comes knocking.”

Every year, basic rate taxpayers can earn £1,000 of interest in a non-ISA account (money in an ISA is shielded from tax up to £20,000 per year), but for higher rate taxpayers earning above £50,270, this Personal Savings Allowance is cut in half, to £500. And for a top rate taxpayer, someone earning £125,140 or above, there is no Personal Savings Allowance, meaning you pay tax on every pound of interest.

Those who exceed their allowance, whether inadvertently or knowingly, will find HMRC getting in touch, and the tax office will usually change your tax code to recover the underpaid tax, unless you usually submit a self-assessment tax return.

Ms Suter adds: “Many of those who have moved their money to better-paying cash savings accounts and find themselves breaching the tax-free limit won’t realise until the taxman catches up. People who have to file a self-assessment tax return will need to declare any interest earned, but for those on PAYE, HMRC will collect the money directly from their payslip by adjusting their tax code. That can lead to a nasty surprise when people see their take-home pay suddenly fall.”