Up to a million savers not used to paying taxes on their nest eggs are facing a £2billion shock as new rules take effect, according to analysis by a leading accountancy firm.
The changes are likely to punish savers with bills of up to £2,000 over two years – including penalties for those who inadvertently forget to comply, research from Azets estimates.
Former Tory leader Iain Duncan Smith said ordinary savers were being penalised while Baroness Altmann, a former pensions minister, said: ‘Savers haven’t been treated fairly for years.’
People with modest shareholdings are allowed to earn dividends tax-free if they are below a certain level.
Similarly, they can sell those shares at a profit without being taxed if the gain is small enough.
Changes brought in by Chancellor Jeremy Hunt (pictured) mean the level of those exemptions is falling, dragging even those with modest assets into being liable
But changes brought in by Chancellor Jeremy Hunt mean the level of those exemptions is falling, dragging even those with modest assets into being liable.
The dividend allowance fell from £2,000 to £1,000 in April this year and will be cut again to £500 from April next year.
Capital gains tax annual exemptions have gone down from £12,300 to £6,000 in the current tax year and will fall further, to £3,000, in 2024/25.
Rising interest rates and higher wages will further add to the complex picture by potentially leaving account holders liable to taxes on earned interest.
Savvy savers can offset tax charges by putting up to £20,000 a year into tax-free individual savings accounts (ISAs).
But others who have built up small sums over the years and may not have received tax planning advice could stand to lose out.
John Hiddleston, associate director at Azets, said: ‘Very soon, significant numbers of people who aren’t used to paying tax on their savings are likely to have to do so.
‘If you have a tax liability, you’re obliged to notify HMRC about it.
‘However, many of these people won’t be used to submitting a tax return, they won’t be issued with a notice to do so by HMRC, and they won’t realise they have a tax liability.
‘Therefore, lots of ordinary people could receive surprise tax bills, with significant penalties added for inadvertent non-compliance.
‘We estimate this will impact hundreds of thousands of people – up to a million – with bills of up to £2,000.’
The picture is complicated by rising interest rates – which have surged from 0.1 per cent in December 2021 to 4.5 per cent today – and increasing wages, at a time when income tax bands have been frozen.
Anyone earning over £50,270 pays 40 per cent tax on income above that level.
That threshold has been frozen, even though the value of wages has been gnawed away by a surge in the cost of living, dragging millions of middle-income earners into the higher tax band.
Recent research said one in five taxpayers will be paying at that rate by 2027.
It means that while higher rates of interest on savings might provide a degree of comfort, they could also have tax implications creating a sting in the tail.
That is because interest gained on savings is only exempt from tax up to a value of £1,000 – and then only for basic rate taxpayers. The allowance halves to £500 for higher-rate income taxpayers.
So a worker who has just been dragged into the 40 per cent band and is enjoying higher interest rate payments may also suddenly be liable to be taxed on that sum.
It is the latest blow after savers have suffered for years amid low interest rates.
Rising interest rates and higher wages will further add to the complex picture by potentially leaving account holders liable to taxes on earned interest
Baroness Altmann said: ‘The problem is that many of them over the last ten years have got virtually nothing for their savings and have never had to fill in a tax return and may not know about it.
‘The worry is that if they don’t declare their savings income they may well face penalty charges.’
And she warned that it could be even worse under Labour amid reports that it could lift capital gains tax from its current 20 per cent level to match the 40 per cent top rate of income tax.
‘Although savers are being suddenly hit by a collective £2billion tax increase, if we get a Labour government we just get higher capital gains tax,’ Ms Altmann said.
‘At the moment it’s not fair – but savers haven’t been treated fairly for years.’
Former Conservative leader Iain Duncan Smith MP said of the Government’s changes: ‘It’s a tax hike. I am afraid to say I disagree with it completely. It disincentives people to invest their money.
‘These are not big savers. It is the sort of thing you’d expect Labour to bring in.
‘You are going to get ordinary savers penalised – when you have already taxed them once.’