HM Revenue & Customs (HMRC) is poised to send letters to UK households demanding an additional £992 in taxes, delivering a harsh blow to low-income families. This unexpected burden stems from a little-known tax change that disproportionately affects those earning close to the personal allowance threshold.
Under current rules, individuals earning less than the £12,570 personal allowance pay no income tax. Additionally, the “starting rate for savings” allows low earners to receive up to £5,000 in savings interest without incurring tax liability.
However, the government’s decision to freeze the personal allowance until 2030 in the Labour Party Autumn Budget means this threshold no longer keeps pace with inflation. If it had risen as expected, the personal allowance would be around £15,550 today. This freeze effectively pushes more people into the tax net.
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For example, someone earning £15,549 with £5,000 in savings interest would previously have paid no tax. Now, they face a combined income tax and savings interest tax of £992—£596 on income and £396 on interest—putting a significant strain on their finances.
Sarah Coles, head of personal finance at Hargreaves Lansdown, explains: “With the starter rate for savings, if your income from work or pension is below £12,570, you can earn up to £5,000 in savings interest tax-free. But if your income exceeds that amount, the tax-free allowance decreases by £1 for every £1 earned above the threshold.” Once income reaches £17,570, no starting rate for savings applies.
To soften the blow, financial experts recommend strategies such as transferring cash savings to a spouse with a lower income to utilize their personal savings allowance fully. Charlene Young, senior pensions and savings expert at AJ Bell, advises: “Transferring savings to a basic rate taxpayer spouse can make a big difference, especially if you pay higher-rate tax. They can make use of the full personal savings allowance, reducing your overall tax liability.”
While the freeze on personal allowances has financial consequences for many, careful planning can help individuals minimize the impact of these stealth tax increases.