State pensioners given £1,000 savings warning - and told of 'rapid escalation in tax'

Pensioners are set to face a tax increase of over 200% on the interest earned from their savings, according to an analysis by Paragon Bank. Utilising data from HMRC, the bank discovered that savers aged 65 and above are predicted to pay £2.5bn in taxes on their savings interest this tax year.

This is a staggering 215% increasecompared to the amount paid in the 2022/23 tax year. Tax receipts from savers under 65 are also anticipated to rise significantly, up 186% to £3.6bn during the same period.

However, the proportion of total savings interest tax paid by those aged over 65 will increase from 39% to 41%. "We're witnessing a significant and rapid escalation in the tax burden on savers nearing or enjoying retirement. This could have a profound impact on their long-term financial wellbeing," commented Andrew Wright, head of savings at Paragon Bank.

"Many mature savers are facing unprecedented tax charges on the interest earned from their savings, which can have a substantial impact on their long-term financial wellbeing."

An increasing number of people have been compelled to pay tax on their saving income after interest rates skyrocketed but the government's personal savings allowance remained unchanged. The personal savings allowance permits basic-rate taxpayers to earn up to £1,000 in savings interest tax-free, while higher-rate taxpayers receive just £500.

Additional-rate taxpayers receive no allowance at all and pay tax on all interest earned outside of tax-free accounts like ISAs. "More mature savers typically have healthy savings balances and a preference for less volatile investments, so favour cash,"ence for less volatile investments, so favour cash," stated Wright.

"With the personal saving allowance and income tax thresholds frozen, that has resulted in better returns for savers aged 65 or above translating into a greater tax burden.

"There are also other factors, such as more people opting to work for longer, thus potentially maintaining higher incomes."

How can you avoid charges on your saving interest?

Wright suggested one effective method to alleviate some of this increased tax burden was by transferring funds into an ISA, where savings interest is protected from tax."

ISAs remain an accessible and flexible option, enabling savers to safeguard more of their hard-earned money and maximise their nest eggs as they plan for, or live through, retirement," he stated.

Savers can deposit £20,000 into an ISA without paying any tax on it.