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Record number of savers and investors facing a tax bill
You could face tax charges with as little as £10,600 saved
More people than ever before are set to fall foul of tax on savings and tax on dividends as a result of frozen thresholds and allowance cuts.
Freedom of information requests submitted to HMRC by the investment platform AJ Bell have revealed that 2.6 million people will have to pay tax on their savings interest this tax.
Additionally, 3.7 million face a dividend tax bill. Both figures have more than doubled since 2021-22.
Read on to find out the tipping points for your savings and investments after which you’ll be slapped with a tax bill.
How much can you invest in dividends before triggering a tax bill?
You won't need to pay anything on the first £500 of dividend income you receive per tax year – this is called the tax-free dividend allowance.
This allowance has been cut in recent years from £2,000 in 2023.
With the help of investment platform interactive investor, Which? has crunched the numbers to find out how much you can invest into a typical passive income fund before landing yourself a bill.
Using the Vanguard FTSE U.K. Equity Income Index Fund as a proxy, which has a historic yield of 4.32%, you could invest up to £11,574 before hitting the £500 limit.
Investing anything above this would see basic-rate taxpayers hit with dividend tax at 8.75%, rising to 33.75% for higher rate and 39.35% for additional-rate taxpayers.
‘Over 3.7 million people are expected to pay tax on dividend income, which is more than double what it was four years ago,’ said Laith Khalaf, head of investment analysis at AJ Bell.
‘Combined with frozen tax thresholds dragging more people into higher tax bands, this could mean heaps more tax for those with even modestly sized portfolios.’
- Find out more: Dividend tax explained
How much can you save up before triggering a tax bill?
Basic-rate taxpayers can earn up to £1,000 in savings interest per tax year without paying tax, or £500 if you're a higher-rate taxpayer. Additional-rate taxpayers don't get an allowance.
The interest rate on the average instant-access account has jumped from 0.16% in June 2021 to 2.59% today, according to data from Moneyfacts.
Using this as our starting point, you could save up to £38,610 as a basic-rate taxpayer, or £19,305 as a higher-rate taxpayer, before breaching your personal savings allowance.
However, plenty of accounts on the market today are offering considerably better rates.
The best unlimited deposit instant-access rate at the time of writing is Chase’s instant-access account offering 4.75%. At this rate, the amount you could save drops to £21,053 as a basic-rate taxpayer, or just £10,527 as a higher-rate taxpayer, before triggering a tax bill.
‘The government has frozen tax thresholds and left the Personal Savings Allowance untouched since it was introduced more than nine years ago,’ said Laura Suter, director of personal finance at AJ Bell.
‘With interest rates rising sharply, more savers are being dragged into the tax net without any policy change – it’s tax by stealth. What was once a tax affecting wealthier savers is now catching out everyday basic-rate taxpayers.
‘Many won’t realise they’ve breached their allowance until HMRC comes knocking.’
- Find out more: Best savings accounts 2025
4 ways to maximise your savings without paying any tax
- If you've got more than a few thousand pounds in savings, put extra savings into a cash Isa. You can deposit up to £20,000 into Isas per tax year.
- When selecting fixed-term savings accounts outside an Isa, check when interest is paid. Look for those that pay monthly or annually, rather than 'at maturity', when the combined interest might push you over your personal savings allowance.
- With savings you don't need for at least five years, you could earn a better return by investing. A stocks and shares Isa means all profits and dividends are tax-free.
- If you've maxed out your Isa allowance, consider making additional voluntary contributions to your pension
