Millions more savers face cuts to tax-free allowance in Budget

 Rachel Reeves is poised to extend a freeze on income tax thresholds until 2030

Source - Daily Telegraph - 

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Chancellor Rachel Reeves is poised to extend a freeze on income tax thresholds until 2030 in her maiden Budget on Wednesday.

The move, which would drag more workers into paying 40pc tax, would cost millions their personal savings allowance, according to analysis by Coventry Building Society.

The lender said under the policy, 2.7 million more earners would have their savings allowance – the amount they can earn before tax – reduced to just £500 by the end of the decade.

Analysis of Office for Budget Responsibility (OBR) figures by Coventry Building Society ahead of Wednesday’s Budget said savers are on track for a total tax bill of more than £12bn in 2029. 

The lender said regular earnings growth would pull seven million workers into higher tax bands, and that an estimated 2.7 million would see their personal savings allowance fall from £1,000 to just £500 as a result.

Income tax bands and the tax-free personal allowance have been frozen since 2021. The previous Conservative government had planned for thresholds to rise with inflation again between 2028 and 2029.

However, Ms Reeves is currently weighing whether to extend the freeze by a further two years to plug a £40bn shortfall in the public finances.

The policy is known as fiscal drag because while it does not raise headline income tax rates, it drags workers into paying more tax as pay rises tip them into higher bands. The tax-free personal allowance does not rise in line with inflation each year.

Jeremy Cox, of Coventry Building Society, said: “A double whammy of fiscal drag and higher interest rates has led to a surge in the number of people paying tax on savings income and the amounts they’re having to cough up.

“Savers are typically earning higher interest rates on their savings pots than they were a few years ago. And, while tax-free cash Isas have surged in popularity, those with money in non-Isa savings are using up their personal savings allowances more quickly.”

Savers are not alone in being impacted by a continued freeze on tax thresholds, with a slate of middle income professionals, including police officers, accountants and civil engineers, expected to be dragged into the 40pc tax bracket as earnings steadily grow.

Tom Selby, of investment platform AJ Bell, urged savers to use up their Isa allowance.

The number of savers maxing out their annual tax-free Isa allowance increased by over 300pc in the first two weeks of October according to investment platform Bestinvest.

Isas have also become an attractive option for savers wanting to shield their cash from potential increases in capital gains tax.

Mr Selby said: “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.”