AJ Bell projects 2.7m savers to pay tax on savings interest in 2023-24

AJ Bell expects the number of savers paying tax on their savings interest to rise from 1.8 million to 2.7 million in 2023-24, according to figures reported by Which? on 17 August 2023¹. The comparison site said the 1.8 million savers who exceeded their personal savings allowance last year generated £3.4bn for the Treasury¹.

The personal savings allowance lets basic rate taxpayers earn up to £1,000 of savings interest a tax year without paying tax, or £500 for higher rate taxpayers; additional rate taxpayers get no allowance¹. Which? calculated the balances at which savers would exceed those limits, based on the top one-year account at the time of writing, which paid 6.1% (Beehive Money, Nottingham Building Society)¹.

Source: Which?, 17 August 2023¹

Which? also noted that the best one-year fixed cash Isa at the time of writing paid 5.77% (UBL UK, United National Bank), and that up to £20,000 can be deposited into Isas per tax year¹. On its figures, a full £20,000 Isa allowance would earn £1,154 in interest, while the top savings account would earn £1,220 after tax for a basic rate taxpayer, £66 more than the Isa; higher rate payers would earn £932 after tax¹.

The allowance is withdrawn in stages as income rises. Which? reported that earning even a pound more than £50,270 halves the personal savings allowance, and that it is lost entirely above £125,140¹. It added that a projected 5.6 million people will pay the higher rate of income tax in 2023-24, up 41% compared with 2020-21¹. Savers with income below £17,570 may be able to use the starting rate for savings, which allows up to £5,000 of savings interest tax free¹.

Which? singled out holders of long-term fixed-rate accounts such as five-year bonds, which in some cases pay all their interest in one go: all the interest is treated as earned in the year it was paid, rather than spread across the years of the account¹. On payment, it said any tax due is usually collected automatically through PAYE using information from banks and building societies, or declared on a self-assessment return¹.

Why it matters for households

The change affects savers whose interest exceeds their allowance in 2023-24, and the effect depends on the rate they are on. A higher rate taxpayer reaches the £500 limit at a much smaller balance than a basic rate taxpayer, and additional rate taxpayers have no allowance at all¹. Because the allowance is tied to income thresholds rather than to interest rates, a pay rise that takes someone above £50,270 cuts their allowance to £500, and above £125,140 it disappears¹. For anyone with a fixed-term bond that pays interest at maturity, the whole amount can fall into a single tax year, which can push a saver over the limit in that year even if the interest built up over several¹. Tax on savings interest is normally taken through PAYE rather than a separate bill, so the deduction may appear in a payslip or pension payment rather than as a demand¹. The starting rate for savings can apply to those with income below £17,570¹.

What happens next

The 2.7 million figure is a projection for the 2023-24 tax year, which ends on 5 April 2024¹. No further dates have been reported.