The number of people expected to pay tax on their savings interest will have trebled in three years, new data shows.
Many more savers will be forced to pay savings tax as interest rates have risen and people hit their tax-free limit.
Almost 2.1million people are expected to pay tax on their savings this year, up from around 647,000 in the 2021/22 tax year, a Freedom of Information request from AJ Bell reveals.
The number of people expected to pay savings tax jumped to 1.1million in the 2022/23 tax year and again rose to 1.9million in the 2023/24 tax year. Data shows that almost 2.1million people could pay savings tax in the current tax year.
Tax trap: The number of savers who will have to pay tax on their savings interest is set to double over the next two years
The number of basic-rate taxpayers being hit with the tax will near 1million people, up from just half a million in 2022/23.
However, these figures are lower than the initial amount forecast by the Government.
An FOI by AJ Bell last year showed that the Government projected 2.7million people would be hit with tax on their savings in the 2023/24 tax year, which has now been revised down to 1.9million.
AJ Bell said this could be down to several factors, including more people using cash Isas to protect their savings from tax, fewer people switching to higher interest savings accounts, and interest rates not being as high as HMRC initially projected.
Savers have piled £42billion into cash Isas in the first six months of the year, data from Paragon Bank shows.
At the end of June, there was £351.6billion held in adult cash Isas, a jump of £42million compared to £309.3billion at the end of December 2023 as savers rushed to lessen the tax sting.
Though less than government estimates, it still means that around 1 in 30 basic-rate taxpayers are expected to pay tax on their savings this year, up from less than 1 in 100 three years ago.
Almost 1 in 10 higher-rate taxpayers are expected to pay the tax now, compared to around 1 in 25 just three years ago.
In June, HMRC said it expects to receive an extra £3.8billion in revenues from savings tax this financial year.
Its latest estimates revealed the amount of tax savers pay on their savings interest will climb to £10.37billion in 2024/25, up from £6.6billion in 2023/24.
Of the £10.37billion HMRC expects to receive in savings interest tax, £1.14billion will come from basic rate tax payers, £2.4billion will come from higher rate tax payers and £6.8billion will come from additional rate tax payers.
The Personal Savings Allowances (PSA) protects allows people to earn some savings interest tax free, but it has remained at current levels since it was introduced more than eight years ago.
The PSA currently stands at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers get no exemption and pay tax on all cash interest they receive outside a tax wrapper.
When the PSA was introduced in April 2016, the best one-year fixed rate bond on the market was paying 1.91 per cent, so a basic rate taxpayer would have breached the £1,000 PSA with a deposit of £52,357.
Today, the best one-year bond is paying 4.95 per cent – so a basic rate taxpayer would breach the allowance with £20,230.
Similarly, the best easy-access account available in April 2016 was paying just 1.45 per cent – so the basic rate PSA would have been breached with a deposit of around £69,000.
With the top rates now paying around 4.9 per cent, £20,000 in an easy-access account would earn £980 in interest.
The big appeal of cash Isas is that savers can save up to £20,000 each tax year to protect their savings interest from tax, as any interest earned is completely tax free unlike easy-access or fixed-rate savings accounts.
Laura Suter, of AJ Bell, said: ‘A tricky combination of interest rates rising, cash Isas being shunned for decades, more people moving into higher tax brackets and seeing their PSA cut, and the tax-free allowance being frozen means lots of people are being dragged into the tax.
‘We know more savers have used cash Isas to protect their savings from tax, thanks to high-profile campaigns about the number of people who are likely to be hit with tax bills.
‘Previously savers often had to make a decision between getting the highest interest rate with a non-Isa account and using a cash Isa, but Isa rates have more closely matched standard savings rates in recent years, removing one of the barriers to using an Isa.
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