- The nation is expected to pay £6.1 billion in tax on savings in 2025/26
- The savings tax bill was dramatically lower last year than the government initially predicted
- Record Cash ISA use and falling interest rates have helped to cut the tax bill
Laura Suter, director of personal finance at AJ Bell, comments on the latest tax figures on savings and investments:
“The total amount the nation is due to pay in tax on their savings will rise again this year, the government predicts, as more people hit their tax-free limits and start handing over some of their savings interest to the taxman. It’s estimated that we’ll collectively pay £6.1 billion in tax on our savings in the 2025/26 tax year – more than triple the bill three years ago. It’s only a slight increase on last year’s figures, reflecting falling interest rates and more people being tax savvy with their savings.
“While higher interest rates have been great for savers to get a decent return on their money, it does mean that more have hit their personal savings allowance and started to pay tax on that interest – often for the first time ever.
“What’s interesting is that the nation’s savings tax bill was dramatically lower last year than the government had initially predicted. It had forecast that we would pay £10.4 billion in tax on our savings in 2024/25, but has now revised that down by a whopping £4.5 billion to just shy of £6 billion. This is likely down to two factors: interest rates not staying as high for as long as initially expected and more people sheltering their savings from HMRC.
“We’ve seen record Cash ISA usage in the past couple of years, as people are aware that they will be hit with tax on their savings. In recent months that has been spurred on by rumours of cuts to the Cash ISA limit, prompting a rush to stuff ISAs now. Households across the UK paid a record £14 billion into Cash ISAs in April, according to Bank of England data – the highest amount since ISAs debuted in April 1999.
“Whether driven by tax bills or rumours, the result is that more people have taken action to prevent handing over money to the taxman. This is great news for savers, but leaves a bit of a dent in the government’s expected tax receipts.
“While this is a small victory for savers, we can’t ignore the fact that the amount of tax we’re paying on savings has risen from just £1.4 billion in 2021/22 to an estimated £6.1 billion in the current tax year – a whopping 336% increase.
“While increasing interest rates are one reason for the rising tax bill, a huge part of it is also that frozen income tax bands mean more people are being pushed into higher tax bands. It means people will see their personal savings allowance cut in half, or lost altogether if they find themselves in the additional rate tax bracket. In some cases the interest people receive is itself pushing them into the higher tax band – meaning they pay the tax at a higher rate and on more of their money.
“This is highlighted in the amount of tax paid by additional rate taxpayers. The threshold for the 45% tax rate was lowered from £150,000 to £125,150 last year. While basic-rate taxpayers get £1,000 of savings interest tax free and higher-rate taxpayers get £500, additional rate taxpayers get taxed on all their savings interest at 45%. In the current year the savings tax paid by additional rate taxpayers is due to rise to £3.4 billion, compared to just £1 billion three years ago.”
Tax on dividends:
“Cuts to dividend allowances and hikes to rates have hit investors and the self-employed hard, with another increase in the amount they are handing over in tax this year. The government estimates that in the current tax year we’ll see another slight increase in the nation’s dividend tax bill, with £18.6 billion to be paid in the tax.
“On top of that it underestimated how much dividend tax would be paid in 2024/25, with the total bill coming in at £500 million more than initially expected, to top the £18 billion mark for the first time.
“Higher rate taxpayers have been some of the hardest hit, as frozen tax bands mean that more people have been pulled into paying the higher rate of tax on their dividends. This group has gone from paying a collective £5.5 billion of tax on their dividends three years ago to being estimated to pay more than £8 billion this year – an almost 50% increase.
“The government has launched a triple assault on investors and company directors in recent years. The move to cut the tax-free dividend allowance from £2,000 down to £500 means more people are paying dividend tax. But alongside this the freeze on income tax bands means that more people are being pushed into the next tax band, and so paying a higher rate of dividend tax. The third part of this is that the government increased dividend tax rates, meaning these taxpayers are handing over more in tax.
“Lots of taxpayers have been making use of ISAs to try to beat the dividend tax. We have seen a continued increase in bed and ISA transactions over the past couple of years and we expect that to continue this year, as more people shelter their money in tax-efficient accounts. On top of that more people will be transferring assets to a lower-tax-paying spouse or using pension contributions to drop to a lower income tax band.”
