Britons are losing billions of pounds in lost interest as part of a stealth savings tax raid, Paragon Bank is warning.
More than three quarters of money held in non-ISA savings accounts could be hit with unexpected tax bills, new analysis reveals.
A staggering £639.7billion of the £831.6billion currently held in non-ISA adult savings accounts is generating enough interest to potentially trigger tax payments.
The figures, released by Paragon Bank following analysis of CACI data, show that 77 per cent of total balances are at risk of breaching tax thresholds.
While this affects a large portion of savings, it represents just 14 per cent of total non-ISA accounts, suggesting wealth is concentrated among a smaller group of savers.
Higher-rate taxpayers face a Personal Savings Allowance (PSA) of just £500, after which they must pay tax at 40 per cent on their savings interest.
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Savers are losing money to a stealth tax raid
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Additional-rate taxpayers receive no PSA at all, meaning all their savings interest is taxable. Basic-rate taxpayers have a more generous £1,000 PSA threshold before tax applies.
At current interest rates, a savings balance of £12,500 earning four per cent would generate £500 in annual interest, reaching the higher-rate PSA limit.
For basic-rate taxpayers, a balance of £25,000 would be needed to generate £1,000 in interest before tax applies.
The number of accounts exceeding the PSA threshold has risen dramatically over two years.
Latest figures from September 2024 show 9.7 million non-ISA savings accounts are now generating enough interest to surpass the £500 threshold.
This marks a significant increase from September 2023, when 8.2 million accounts were affected.
The rise is even more stark when compared to September 2022, when just two million accounts were generating sufficient interest to breach the higher rate PSA threshold.
Derek Sprawling, Paragon Savings’ managing director, warns of the growing tax exposure for savers.
Savers are being urged to prepare for a potential stealth tax raid over the next two years
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“These rising balances, fuelled by higher rates relative to the previous decade, leave some of the most proactive savers exposed to unexpected tax bills,” he says.
He points to ISAs as a solution, noting: “Cash ISAs offer a valuable shield against this burden, allowing savers to shelter up to £20,000 per year from tax.”
Sprawling adds that while many savers have already moved towards ISAs, those who haven’t used their allowance should consider doing so to protect their interest from tax.
Savers looking to protect their money from tax have options available through ISAs. The tax-free ISA allowance stands at £20,000 per tax year, offering a significant shelter for savings.
