HMRC faces rising demand as more savers are forced into tax net

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The UK’s tax authority has warned that it faces additional costs this year as 1.2mn extra people are pulled into the tax net because of higher earnings and savings rates.

Jim Harra, chief executive of HM Revenue & Customs, told MPs on Wednesday that the tax authority was preparing to deal with growing demand from taxpayers after concerns that it would be swamped by calls from unsuspecting savers.

Many savers are facing a tax charge for the first time this year after a long period of rock-bottom rates as higher interest on savings accounts pushes their earnings beyond the tax-free threshold.

The trend is part of a broader process of “fiscal drag”, with millions more earners being dragged into higher tax bands as a result of rising earnings and frozen tax allowances and thresholds.

Figures released by HMRC in July showed that an extra 1mn taxpayers would pay tax on savings interest this year. The data forecast £6.6bn of savings interest tax paid by 2.7mn taxpayers, up from £3.4bn in 2022. By comparison, inheritance tax is forecast to raise £7.2bn.

The savings tax windfall for the Treasury risks causing a headache for HMRC as surprised savers seek clarity over their taxes and some file returns for the first time.

The tax-free allowance on savings interest is set at £1,000 for basic rate taxpayers and decreases to £500 for higher rate taxpayers. Additional rate payers, those earning more than £125,140, do not have an allowance. The allowances have not been increased since 2016.

Harriett Baldwin, chair of the Treasury select committee, said the effects of fiscal drag posed a “nightmare” scenario for the tax authority, which would need to field additional calls. “It’s not just savings but also people having their tax thresholds and allowances frozen,” she said.

Laura Suter, personal finance analyst at AJ Bell, which obtained the July HMRC figures through a Freedom of Information request, said: “Tax on savings has become quite a cash cow for the government.”

Jim Harra, head of HMRC, says: ‘The challenge is tougher and tougher’ © Charlie Bibby/FT

The tax authority has come under fire in recent months after it shut down a self-assessment helpline as a temporary measure over the summer to divert resources to areas facing higher demand.

It is also attempting to funnel more taxpayers into digital services to meet tighter budgets.

Harra told the committee in October that HMRC did not have the resources to deal with growing demand.

“The challenge is tougher and tougher because the increasing number of taxpayers in the system means increasing contact . . . We do not have increasing resources to deal with that contact,” he said. 

In a letter to the committee on Wednesday, the HMRC chief executive said the department did not know how many taxpayers in total faced greater complexity in their tax affairs.

He added that the majority of taxpayers facing more complex tax affairs this year were already within the tax system.

Harra said the plan for dealing with the demand was to make “efficiencies, such as our work to reduce customer contact demand and maximise digital self-service”.

Baldwin this week raised concerns that many middle-income families will be surprised to find that their child benefit is being withdrawn as earnings, including any extra savings income, exceed a £50,000 threshold.

At that point a tax charge is imposed at 1 per cent of child benefit for every £100 of income, so that child benefit is withdrawn completely by the time income hits £60,000.

Chancellor Jeremy Hunt is aware of concerns around the issue, not least because it will affect a large swath of potential Tory voters, but government insiders said that tight public finances meant he was unlikely to provide any succour in his Autumn Statement.

“There are lots of worthy things to do, but we don’t have leeway for many changes,” said one ally of Hunt, noting the tight fiscal position facing the chancellor.

The Treasury said about 90 per cent of taxpayers did not pay tax on their savings income and it invited individuals to make use of the “generous” £20,000 tax-free individual savings account allowance.

HMRC said: “For the majority of customers, tax on savings interest is automatically collected using their tax code.”

It added: “We will contact those who are not employed, do not get a pension or do not complete a self-assessment directly, should they need to pay tax on their savings interest.”

Mike Ibanoz

Mike Ibanoz is an Emmy Award-winning journalist who has spent the better part of two decades covering gadgets and apps, and helping people make smarter tech decisions.

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