Rising Tax Burden on Savers Amid Fixed Income Thresholds

Recent data indicates that an estimated 3.35 million individuals will pay tax on the interest earned from their savings in the current year, up from 3.06 million in the 2020-21 period. This upward trend is projected to continue as Rachel Reeves is anticipated to maintain current income thresholds, alongside persistently high interest rates. Analysis by Nottingham Building Society utilizing HMRC data reveals that, despite a minor decline in 2021-22, the number of people reporting taxable interest through self-assessment has increased consistently over the past five years. Projections further forecast a notable rise in the total number of income tax payers, jumping from 34.5 million in 2022-23 to 39.1 million by 2025-26, with basic and savers rate taxpayers alone expected to reach 30.8 million—a 6.8% rise constituting approximately 79% of all taxpayers.

Additionally, the forecast suggests a substantial increase in the number of higher rate taxpayers by nearly 39%, bringing their total to 7.08 million, while additional rate taxpayers are set to more than double, reaching 1.23 million. This change is largely attributed to fiscal drag, where a freeze on income tax thresholds leads more individuals into higher tax brackets, despite only modest growth in nominal incomes. Analysts predict that in her upcoming autumn Budget, Chancellor Reeves will likely extend the freeze on income tax thresholds to replenish funds following the government's reversal on welfare reforms. Originally initiated by former Chancellor Jeremy Hunt, this freeze is slated to last until 2028.

Harriet Guevara, Chief Savings Officer at Nottingham Building Society, has raised concerns about the mounting, often unnoticed tax obligations imposed on average savers. She emphasized that the anticipated rise in basic-rate taxpayers by nearly two million in the next three years, and the doubling of additional-rate taxpayers, creates increasingly burdensome tax responsibilities for ordinary individuals. Amid the challenge of escalating living costs and static thresholds, she argues that the government should prioritize measures that support and incentivize savers instead of imposing stricter limits like the £20,000 tax-free threshold on cash ISAs. Guevara advocates for reforms that simplify and strengthen savings vehicles rather than complicate them with new restrictions.

At Nottingham Building Society, they have observed this trend firsthand, with over half of their fixed-rate ISA clients utilizing the full £20,000 allowance last year, a figure that increased to 65% among customers visiting branches. According to Guevara, these customers are not affluent investors but rather everyday individuals striving to save for essential financial milestones such as home deposits, retirement funds, or creating a safety net for future uncertainties.