The number of pensioners set to pay tax on their savings will exceed two million for the first time according to new figures, more than quadrupling over the last four years.
Data released by HMRC shows that the number of people aged 65 and older who must pay tax on interest accrued on their savings is forecast to rise from 517,000 in 2022/23 to 2.1 million in 2026/27.
The 300 per cent rise has been blamed on the government’s decision to maintain frozen income tax thresholds, alongside higher savings returns arising from increased interest rates.
Andrew Wright, head of savings at Paragon Bank, which obtained the figures, said: “The personal savings allowance has remained unchanged, so more people are being pulled into the tax net as their incomes and savings interest rise.
“Higher interest rates have been positive for savers, helping them earn more on their money, but they have also increased the likelihood of breaching the allowance,” he told The Telegraph.
open image in galleryUnder current rules, income tax is due on earnings above the personal allowance of £12,570. An exception is applied to Isas, which have a tax-free allowance on up to £20,000 a year.
Basic-rate taxpayers can also keep an additional £1,000 in savings interest from HMRC each year, dropping to £500 for higher-rate taxpayers. There is no savings interest allowance for additional-rate taxpayers.
These savings thresholds remain frozen alongside the main income tax rates.
It means a pensioner holding £30,000 in savings at an interest rate of 4.5 per cent a year, £1,350 would breach the allowance by £350.
This amount would be added to their other income sources – mainly the state pension and any private pensions – to determine how much they should be taxed on overall.
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open image in galleryAt 2.1 million, over 65s are forecast to make up nearly half (47 per cent) of all individuals liable to save tax on their savings. This is forecast to be worth more than £3.34bn to government coffers in 2026/27, the HMRC data release shows, up from £795 million four years ago.
Mr Wright said that older savers can make the most of government allowances to lower their tax liability within the rules.
He advises: “With savings often providing vital financial security later in life, it is important to regularly review where your money is held. Making full use of your Isa allowance can help protect more of your hard-earned interest from tax and those aged 65+ have the benefit of retaining the full £20,000 cash Isa allowance from next tax year.”
Changes to the Isa system were announced by former chancellor Rachel Reeves at last years’ Budget, reducing the allowance for Cash Isas to £12,000 for all savers under 65. The total allowance remains £20,000 for all individuals, which can also be spread to a Stocks and Shares Isa.
An HM Treasury spokesperson said: “Anyone whose only income is the full new or basic State Pension without any increments will not pay income tax and we are committed to that over this Parliament.
“By keeping the Triple Lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from the highest Personal Allowance in the G7.”