Four times as many will pay tax on their hard-earned savings this year compared with 2021-22. Some 2.64million will be stung by income tax on the interest they earn in their savings accounts in 2025-26, says HM Revenue & Customs.
The taxman is clawing back earnings on a record number of savers, with another 120,000 dragged into the net over the past year. Four years ago, just 647,000 paid the punitive tax.
This is because while savings rates have soared, the Personal Savings Allowance (PSA) has been frozen for nearly a decade.
Interest on savings is treated as income and taxed at your marginal rate of income tax.
Stung: Four times as many will pay tax on their hard-earned savings this year compared with 2021-22
Savers all have a PSA, giving them £1,000 or £500 of interest tax-free, for basic and higher rate taxpayers, respectively.
A basic rate taxpayer would breach their PSA with £19,600 in the top easy-access account, while a higher-rate taxpayer would breach it with £9,800 saved. This was £154,000 and £77,000 respectively in 2021.
Banks and building societies automatically report interest earned to HMRC. So how can you sidestep the tax? We asked experts for their top tips…
1) Put your savings into an Isa
The best way to shield savings from tax is to funnel your money into an Individual Savings Account (Isa).
These are much like any other type of cash savings account, except any interest earned is completely sheltered from tax.
You can put up to £20,000 into Isas every tax year. Savers can bag a rate above 5 per cent on easy access Isas, while one-year fixes pay up to 4.3 per cent.
Laura Suter of stockbroker AJ Bell says: ‘Using tax wrappers like cash Isas or investment Isas is now more important than ever to protect your savings.’
2) Max out other allowances
If your only source of income is your savings interest – and that is less than £100,000 – you qualify for tax-free allowances. These are the personal allowance of £12,570 and the £5,000 starting rate for savings.
Low earners can use their personal allowance of £12,570 to earn interest tax-free if it has not been used up by earnings or other income, such as a pension.
Those earning less than £12,570 receive an extra £5,000 tax-free allowance for their savings income.
This means someone can earn £12,570 in income and £6,000 in savings interest (£5,000 starting savings allowance plus the personal savings allowance of £1,000) before tax is applied.
Another way you could cut a tax bill is by transferring some of your personal allowance to your spouse if they earn less than you and below £12,570.
3) Premium Bonds
Tens of millions flock to National Savings and Investments (NS&I) to win one of two £1million prizes in the monthly Premium Bonds draw.
Any prizes are tax-free.
Prizes offered by the Treasury-backed bank NS&I range from £25 to £1million and the maximum you can invest in Premium Bonds is £50,000.
But winning is not guaranteed and your money won’t earn interest in Premium Bonds.
The odds of any Premium Bonds winning a prize in a monthly draw is one in 22,000.
4) Invest in gilts
For those with larger amounts of cash they don’t need immediate access to, investing in government bonds can be a tax-efficient alternative.
Look for gilts with low coupons that can be bought below the value at which they will mature.
This is because price gains made on gilts are exempt from capital gains tax.
You receive a regular income, known as the coupon, and if you hang on until the maturity date you get all your money back, except in the unlikely event that the UK defaults on its debt.