Savings income and the rise
in higher rate taxpayers
Bank of England base rate increases, coupled with higher savings rates and frozen tax thresholds, are seeing more people pushed into the higher rate taxpayer category, or paying more tax on savings income. Tax-efficient investments could mitigate this burden.
National Savings & Investments (NS&I) offeried a one-year savings bond with a table-topping fixed rate of 6.2% in August that has already been pulled after 5 weeks due to over 225,000 signing up. A higher rate taxpayer will use up their £500 savings allowance with just over £8,000 invested in a bond. With £25,000 invested, there will be more than £1,000 of taxable savings income. However, it wasn’t that long ago that a higher rate taxpayer could have had £100,000 invested before facing tax.
No surprise, then, that the number of taxpayers paying tax on savings income for 2023/24 is expected to be a million more than last year.
It is estimated that over 2.7 million taxpayers will have to pay tax on their savings income in this tax year, including nearly 1.4 million basic rate taxpayers – even though they have a higher (£1,000) savings allowance.
The sudden increase in savings income is likely to catch many savers out. There are two ways that HMRC will collect these extra taxes:
In both cases, taxpayers should keep careful track of the savings income they receive, especially if accounts are regularly opened and closed. Tax codes are notoriously inaccurate, so adjustments for savings income should always be checked.
Minimising tax where you can
Once taxpayers realise the tax implications of higher interest rates, they will want to minimise any future liabilities. Here are a few suggestions:
Higher rate tax
Just as savers are being caught out with increased interest rates, more taxpayers are being inadvertently brought into the higher rate tax net because of frozen tax thresholds, and the personal allowance and the basic rate tax threshold having been unchanged since 2021/22. HMRC statistics show the number of higher rate taxpayers for 2023/24 growing over 40% since 2020/21.
There are no extra administrative requirements when moving into a higher rate tax band, but taxpayers will want to minimise their liability. One problem will be that many simply do not have any spare funds to lock away in tax planning measures.
For those who are not so constrained: