Savers face may hidden tax rise from today as change expected

Under the new Labour Party government, savers could be hit with a stealth tax following today's Budget. The Chancellor, Rachel Reeves, who is also a Labour Party MP, might extend the current freeze on income tax thresholds until 2030.

This move is expected to draw more people into the higher rate of income tax, which stands at 40 per cent. Consequently, the personal savings allowance for 2.7 million workers could be cut down to just £500.

Normally, any interest you earn is automatically paid into your savings account. If the interest exceeds the personal allowance, then some tax will be due to HMRC, which can be paid through your tax code.

The PSA also applies to income from corporate bonds, government bonds, unit trusts, open-ended investment companies, investment trusts, trust funds, and even life annuity payments. An analysis by the building society of Office for Budget Responsibility (OBR) figures suggests that savers could face a collective tax bill of over £12 billion in 2029.

It is estimated that 2.7 million workers would see their personal savings allowance halved from £1,000 to just £500, reports Birmingham Live.

Tom Selby, director of public policy at AJ Bell, has issued a warning to savers in light of the ongoing freeze on income tax thresholds. He advised: "This is an inevitable consequence of the deep freeze on income tax thresholds and something all savers need to be aware of. If you have significant cash savings and are likely to pay tax on your interest earnings as a result, it's worth considering putting some or all of these in a tax product like an ISA, where they can grow completely tax-free."

Meanwhile, accountancy group BDO cautioned that the Chancellor might consider imposing a cap on ISA savings, suggesting: "It's not impossible that the Chancellor could seek to impose a lifetime cap on ISA saving - perhaps set at around £500,000."

For employed individuals who exceed their personal allowance, banks will inform HMRC about the interest earned on savings accounts, with tax due paid automatically through PAYE.

Self-employed persons with interest income from non-ISA savings exceeding their Personal Savings Allowance (PSA) must ensure this is declared on their self-assessment tax return.