NEARLY 2 million people are taxed for the first time little is known.
Anyone with a bank account where they earn interest on their savings is subject to an unexpected bill.
That’s because rising interest rates mean more people are making money off of the money they’ve stored.
But earn a certain amount and you will have to pay taxes on it.
The data has revealed that 1.8 million people have been taxed on cash savings interest.
The average amount owed to the taxpayer is £2,000, but the exact amount depends on how much you earn and your tax rate.
Many savers may not even realize they are affected.
Since interest rates have been so low for a long time, fewer people are affected, and many may not even be aware of it.
Everyone has a personal savings allowance – the money they can earn from interest is tax-free.
Beyond this amount, you pay taxes at either 20% or 40%, depending on your income tax rate.
The annual allowance is £1,000 for base tax holders (20%) and £500 for higher rate taxpayers (40%).
The allowance applies to cash gains in most bank accounts, in addition to tax-free ISAs.
Tax is paid through self-assessment or deducted from income through tax code adjustment.
Many people won’t know they owe cash savings interest tax and may unexpectedly find their tax code changed by HMRC to deduct money from their payslip.
Figures obtained by investment platform AJ Bell show that the number of savers penalized jumped from 972,000 in tax year 2021/22 to 1,770,000 in 2022/23.
Although cash savings depreciate in real terms, with the best savings rates still well below inflation, taxpayers owed HMRC more than £3.4 billion last year.
This means that the average bill someone has to pay tax on their cash savings amounts to almost £2,000.
However, this can be pushed higher as some wealthy individuals pay large tax bills if they hold a substantial amount of cash.
With interest rates expected to rise, more people could soon be enticed into paying taxes.
These numbers could get worse as interest rates rise and the personal savings allowance remains frozen.
The government is expected to earn £6.6 billion from taxes this year.
AJ Bell is calling on the Prime Minister to end the personal savings allowance freeze, which has been set at the same level since 2016.
With cash interest rates currently above 5% on some accounts, individuals with as little as £10,000 – £20,000 in cash could be affected.
Coupled with the recent rate hike, the freeze means that even those with rainy day savings are being hit with tax penalties.
Laura Suter, head of personal finance at AH Bell, said: “No one should be penalized for keeping a rainy day savings and doubling the personal savings allowance will ensure households Families are not taxed on cash savings of up to £20,000, based on current rates.
“Add to that insult to injury, because inflation is so high they don’t even make a real profit on their money – but they’re still taxed.
“Until a brown letter is placed on their doormat, some people won’t even realize that they owe interest tax.
“Those who fill out a self-assessment tax return will report any interest savings and subsequent tax payable.
“However, for those taxed under PAYE, HMRC will calculate any tax payable based on information sent to them by banks and building associations.
“That means many taxpayers will see there’s a deduction made from their paycheck each month, often before they realize they owe any money to the taxpayer.”
Paying taxes is essential – but there are a number of ways to earn up to £46,630 more a year without paying a single penny to the taxpayer.
And here we reveal the winners and losers from rising interest rates – find out how you might be affected.
More than a million Britons are facing hidden tax increases by 2027/28 – find out here if you’ll be affected.