HMRC set to rake in £10.4bn in savings interest tax this year

HMRC expects an extra £3.8billion in revenues from savings tax this financial year, its latest figures show.

The amount of tax savers pay on their savings interest will climb to £10.37billion in 2024/25, up from £6.6billiion in 2023/24, new estimates show.

That's an increase of almost £3.8billion - a 58 per cent jump in the course of one year.

It means the amount of savings interest tax savers have paid since 2021, when the Bank of England started to raise interest rates, has risen by 740 per cent.

Savings squeeze: The taxman is set to claw in far more tax in this financial year via savings interest

Between 2021 and 2022, savers paid £1.2billion in tax on their savings interest according to HMRC's income tax liability statistics.

This more than doubled in 2022/23, when the amount of saving interest tax paid soared to £3.4billion.

What's behind the rise in saving interest tax being paid?

One reason for this is interest rates rising, combined with a second brutal factor: the Personal Savings Allowance (PSA) remaining frozen in place since it was introduced in 2016.

HMRC said: 'Income from savings is significantly more in 2024 to 2025 (approximately six times greater than 2021 to 2022), largely due to the actual and forecasted changes in bank and building society interest rates following the large reductions in bank and building society interest rates up to the end of 2021.'

The Bank of England base rate started to rise from an historic low of 0.1 per cent in December 2021 and it was increased 14 times from that date until August 2023 – to its still current level of 5.25 per cent.

This meant that the interest earned on savings rates has also risen. For example, at the beginning of December 2021 the top easy access-account on offer was paying 0.75 per cent - today it's 5.2 per cent.

In the meantime, PSA – available to basic rate payers who pay no tax on the first £1,000 of taxable interest per year and higher rate tax payers, who have a PSA of £500 per year, has remained frozen since its implementation in 2016 – and the cash Isa allowance has also remained at £20,000.

As the Bank of England base rate has risen since December 2021, savings rates have also increased

Figures from HMRC show that of the £10.4billion it 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 paters.

In December 2021, a basic rate taxpayer could deposit £526,315 in the average easy-access account or £125,000 in the average one-year fixed-rate bond before using up their PSA, data from Moneyfacts Compare shows.

Now a basic rate taxpayer would breech their PSA with £32,051 in an easy-access account or £21,786 in an one-year fixed rate account. A stark difference in the space of just two and a half years.

Anna Bowes, co-founder of Savings Champion said: 'With interest rates increasing by so much whilst the PSA has remained the same, savers are fully utilising their PSA with far lower deposits and are therefore paying more tax, even if they are also now using their cash Isa.

'For example, on a rate of 0.75 per cent a basic rate taxpayer would need a deposit of £133,000 to breach the PSA of £1,000. With a rate of 5.2 per cent, just £19,231 would breach the allowance.'

Cash Isas could provide the antidote

Millions more savers have been using Isas to shelter their savings from a tax rade as interest rates have been rising.

Savers funnelled a record £11.7billion into cash Isas in April, official data from the Bank of England showed.

This led to cash Isas receiving the largest inflows for the start of the tax year since the tax-free accounts were launched in 1999.

Jeremy Cox, of Coventry Building Society, said: 'The antidote to paying tax on savings is the cash Isa. You can save anything from £1 up to £20,000 each tax year and you won't pay a penny of tax on the interest earned.'

It helps that some of the best cash Isas now pay 5 per cent or more, now in line with their no-notice easy-access counter parts. Historically cash Isas have offered lower interest rates.

> See This is Money's picks of the five best Isas.