The UK government has made bank on interest and dividend tax hikes in recent years, with tax on savings increasing £5.1bn since the 2020/21 financial year and tax on dividends rising £6.5bn in the same period.
Compiling data from HMRC, analysts at interactive investor determined that tax paid on interest has increased 341% for basic and saver rate taxpayers since 2020/21, soaring to more than 400% for additional rate taxpayers.
On average, the government nabbed around 360% more per taxpayer from tax on savings interest.
Additional rate taxpayers – those earning over £125,140 – have seen their dividend tax increase by 60% since 2020/21, with higher rate taxpayers – those earning between £50,271 to £125,140 – having seen their dividend tax increase by 70%.
The dividend tax allowance halved from £2,000 last year to £1,000 this year, and is set to halve again to just £500 next year.
“With interest rates increases and dividend allowances being slashed, tax on dividends and savings is becoming an increasingly important source of revenue for the government,” said Alice Guy, head of pensions and savings at interactive investor. “Increasing interest rates available on cash mean that for the first time in many years it’s possible to earn a healthy amount from cash savings, and where there’s money, there’s tax.”
Guy recommended investing your cash in a tax-free wrapper such as an ISA or pension fund.
Investors can invest up to £20,000 inside an ISA each tax year and up to £60,000 each year into a pension without incurring a tax charge on these investments.
However, there are downsides to this, Guy explained: “Cash savers also need to think about how easy it is to access their cash, as there’s no point tying up money needed for emergencies in a lifetime ISA or pension you can’t access for years.
“Instead, it’s important to match your investments and savings to your needs, using a pension for long-term investments and an easy access cash ISA for amounts you’re likely to need in the next year.