The UK is nervously awaiting the Autumn Budget which will be confirmed by Rachel Reeves on Wednesday (November 26). State pensioners are being warned that the Chancellor could target their savings pots to raise much-needed funds.
The Personal Savings Allowance (PSA) currently allows people to earn interest on their savings without paying tax. However, due to higher inflation rates, thousands of savers are expected to be dragged into paying tax on their savings. Experts expect those aged 55 or over to be hit hardest by the move – with pensioners making up the majority of this demographic.
As reported by The Sun, data from Raisin UK, a savings comparison site, shows that over-55s have around £20,000 in savings on average. This is almost double that of the next highest group.
Founder Kevin Mountford said: “Just as interest rates have finally started to reward savers, many are finding that their savings income is being taxed – not because they’re wealthy, but because the threshold hasn’t moved in years.”
The PSA has been frozen since 2016 and is not expected to be lifted in the upcoming Autumn Budget. The allowance people get depends on what rate of income tax they pay.
For instance, 20% taxpayers can earn £1,000 in savings interest per year with no tax. Those in the 40% bracket can earn £500 while 45% taxpayers do not get an allowance.
Savers could face a “double whammy” due to inflation. They could be at risk of losing value in their savings as well as being hut by an unexpected tax bill on their interest.
As wages rise in line with inflation, more people are likely to be pushed into the higher tax bracket. This means some savers could have their PSA half from £1,000 to £500.
Martin Lewis, the founder of Money Saving Expert, advises people to move their savings to a cash ISA if they use up their PSA. He is urging people to check if they are “needlessly” paying tax on their savings.
He explained: “It used to be the case that, for most people, the Personal Savings Allowance (PSA) meant that all their savings were tax-free. However, since rates have risen considerably over the last couple of years, this is no longer true.
“At current savings rates, basic-rate taxpayers need to have just over £20,000 in the top easy-access savings account to exceed the PSA (just over £10,000 for higher-rate taxpayers).
“This means that many savers needlessly pay tax – check now how much interest you’re earning and, if it’s enough to bust your PSA (or will be soon), then cash ISAs are a winner.”