Millions of UK Savers Forced to Pay Tax on Cash Savings Due to Fiscal Drag
As the Personal Savings Allowance (PSA) reaches its 10-year anniversary on 6 April, millions of UK savers are being pushed into paying tax on their cash savings due to fiscal drag and unchanged thresholds. Experts warn that many individuals are unaware they have crossed the taxable line, leading to significant financial impacts.
Stagnant Allowance Meets Rising Interest Rates
The PSA, introduced a decade ago, has never been amended despite shifting economic conditions. With interest rates now higher than at its launch, savers are increasingly breaching the allowance. For instance, a £20,000 deposit in a top one-year bond paying 4.58% would earn £916 in interest, exceeding the £500 PSA for higher-rate taxpayers and nearing the £1,000 limit for basic-rate taxpayers, according to Moneyfacts.
In contrast, the same investment in a top one-year ISA at 4.45% would yield £890 completely tax-free, highlighting the advantage of tax-efficient savings vehicles.
Billions Paid in Unnoticed Taxes
A survey by Yorkshire Building Society reveals that over a third of consumers have never heard of the PSA. Over the past ten years, basic-rate taxpayers alone have paid more than £4.7 billion in tax on their savings interest, underscoring a widespread lack of awareness.
Rachel Springall, Finance Expert at Moneyfacts, commented: “April marks the 10-year anniversary of the PSA, and while it protected savings interest from tax when it was launched for many, it’s outdated and needs to change. Interest rates are higher than back then, and more savers are expected to see their savings income taxed in the years ahead due to fiscal drag.”
Impact of Fiscal Drag on Tax Bands
Fiscal drag is pulling basic-rate taxpayers into the higher-rate band at 40%, which halves their PSA to £500. This means even individuals saving for goals like a house deposit could face tax on standard savings accounts, whereas ISAs remain tax-free.
Graham Nicoll, Financial Planner at NCL Wealth Partners, emphasized the need for improved financial education: “Firstly we need improved financial education for children and consumers more generally, to make them aware of the benefits of saving or investing in ISAs and pensions to close the knowledge gap.”
Calls for Allowance Reform
Nicoll added: “The figures are unsurprising as this is a predictable tax grab by stealth as ordinary savers, not just the wealthy, are unknowingly being pulled into paying tax on cash left in the bank. The Personal Savings Allowance has not been increased since 2016, so should be uprated, if not linked to inflation, going forwards.”
With no adjustments to the PSA in nearly a decade, advocates argue that linking it to inflation or regularly updating it could prevent millions from inadvertently paying taxes on their savings, promoting fairer financial practices across the UK.
