A MAJOR warning has been issued to more than 1.1 million people over state pension age who may be hit with income tax on their savings accounts.
Savers are facing a tax bill for interest earned on their pots of cash, according to new HM Revenue and Customs figures.
Some 1,160,000 people are expected to incur an income tax liability on their savings income in 2025-26, according to the figures, obtained by investment platform AJ Bell.
The total has jumped from 493,000 in 2022-23, to 953,000 in 2023-24, and 1,090,000 in 2024-25.
AJ Bell said those over state pension age account for nearly half of the 2,640,000 taxpayers expected to pay income tax on cash savings interest earned in the current financial year.
It also highlighted concerns regarding the growth in the number of people paying tax on savings income, as well as, interest rate rises in recent years and frozen tax thresholds.
This includes the personal savings allowance for interest, which enables basic rate taxpayers to earn up to £1,000 in savings interest tax-free, while higher rate taxpayers have an allowance of £500.
To dodge the tax savers can keep their money in Isas.
There has been recent speculation that the annual allowance for putting money into cash Isas could possibly be reduced, in a bid to encourage people to invest.
More than 14 million people in the UK are thought to have over £10,000 in cash.
The government believes some of this could be invested in the stock market to improve people’s financial health.
It is understood that several options are on the table, but a decision is yet to be made.
Charlene Young, senior pensions and savings expert at AJ Bell, said: “Most people have a personal savings allowance – £500 or £1,000 for higher and basic rate taxpayers respectively – which offers some protection from the taxman’s clutches.
“Likewise, Isas and pensions are the perfect way to shield your savings and investments and maximise your returns.”
She continued: “In retirement it is common to hold a little more cash. People often want to de-risk some of their investments and those with a good handle on their spending needs might look to build a cash flow ladder, or funnel, to match what they’ve got planned for the next few years.
“With an immediate need to take income from assets, it is natural to focus a little more on capital preservation, meaning cash becomes an increasingly useful tool, despite the risks from inflation over the long term.
“Unfortunately, that appears to be leading to a large number of pensioners suffering a tax bill on their cash savings, with increasing numbers being dragged into higher tax bands too.”
To help avoid unnecessary tax bills on savings, Ms Young suggested not taking money from a pension “unless you need it”.
She said: “You’ll pay income tax on withdrawals above your tax-free cash allowance and, once it’s outside a pension, you may be subject to capital gains or dividend tax if you invest it elsewhere.
“If you park the money in cash you may find yourself with an added income tax bill – joining more than one million pensioners with a tax liability on cash savings.
“Second, if you want to hold cash as part of your investment strategy, you can do so within a pension.
“You don’t have to hold the money in the bank.
“Your provider may offer a relatively attractive rate of interest on cash held in a pension, or you could hold investment products that are comparable to cash, such as money market funds.
“You could also think about using an Isa to shelter up to £20,000 a year. Some savers have been paying into regular savings accounts chasing a fractionally higher return in recent years, but that may have backfired for those who find the tax bill now outweighs any additional interest earned and regret not paying into an Isa sooner.”
How you can find the best savings rates
If you are trying to find the best savings rate there are websites you can use that can show you the best rates available.
Doing some research on websites such as MoneyFacts and price comparison sites including Compare the Market and Go Compare will quickly show you what’s out there.
These websites let you tailor your searches to an account type that suits you.
There are three types of savings accounts fixed, easy access, and regular saver.
A fixed-rate savings account offers some of the highest interest rates but comes at the cost of being unable to withdraw your cash within the agreed term.
This means that your money is locked in, so even if interest rates increase you are unable to move your money and switch to a better account.
Some providers give the option to withdraw but it comes with a hefty fee.
An easy-access account does what it says on the tin and usually allow unlimited cash withdrawals.
These accounts do tend to come with lower returns but are a good option if you want the freedom to move your money without being charged a penalty fee.
Lastly is a regular saver account, these accounts generate decent returns but only on the basis that you pay a set amount in each month.
