Savings warning as 800,000 more accounts to be hit with ‘unexpected’ tax bill (Image: Getty)
Nearly a million more savers could face an unexpected bill due to frozen thresholds, new data reveals.
Analysis from challenger bank Shawbrook shows that over six million accounts are now at risk of exceeding the personal allowance (PSA) – an increase of 800,000 in just one year.
According to Shawbrook’s head of savings Adam Thrower, many savers could now encounter an “unexpected pitfall” as higher push them into taxable territory.
He said: “In the past, tax on savings was something not many needed to think about due to the low on offer. However, with higher rates now available, many savers could encounter an unexpected pitfall that eats into their hard-earned interest.”
Recent data from monitoring platform CACI, based on the October figures from the Current Account and Savings Database, shows 6.1 million accounts are set to earn more than £1,000 in interest – triggering a potential tax bill. This is up from 5.3 million accounts in October 2023.
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The shock pitfall will “eat into hard-earned interest”, an expert has said. (Image: Getty)
The personal savings allowance, which was introduced in 2016, enables savers to earn a set amount of interest tax-free, depending on their income tax bracket.
Basic-rate taxpayers can earn up to £1,000 in interest tax-free, while higher-rate taxpayers can earn up to £500. Additional-rate taxpayers, however, are not eligible for a PSA, meaning all of their interest income is taxable.
Mr Thrower points out that a higher-rate taxpayer saving £11,000 in a non-ISA account paying 4.57% could see their interest exceed the £500 tax-free allowance.
This comes as income tax thresholds, which were frozen by the previous Conservative government until 2028, remain unchanged under Labour.
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According to the Office for Budget Responsibility (OBR), this freeze will push an additional 3.2 million people into higher or additional-rate tax bands by 2028-29.
For those wanting to avoid tax on their interest, Mr. Thrower recommended using Individual Savings Accounts (ISAs), which allow individuals to save up to £20,000 tax-free. He suggested savers should consider using this allowance before it resets in April.
He also advised savers to shop around for better rates, adding: “Looking beyond the big names and high street banks could mean you find a better rate of return, allowing you to make the most of the tax-free earnings.”