Coventry Building Society issues urgent warning as millions of savers face 'double whammy' at Budget - are you affected?

Chancellor Rachel Reeves is considering prolonging the freeze in her upcoming Budget, a move that would reduce the personal savings allowance for many and push more workers into higher tax brackets.

Jeremy Cox, of Coventry Building Society, warned: "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."

The policy could see an estimated 2.7 million more earners have their savings allowance slashed to just £500 by the end of the decade, potentially leading to a substantial increase in tax bills on savings by 2029.

The analysis by Coventry Building Society, based on Office for Budget Responsibility figures, suggests savers could face a total tax bill of over £12billion by 2029.

This stark increase is attributed to regular earnings growth, which is expected to push seven million workers into higher tax bands.

Income tax bands and the tax-free personal allowance have been frozen since 2021. While the previous Conservative Government had planned to resume inflation-linked increases between 2028 and 2029, Labour's potential extension could prolong the freeze for an additional two years.

The policy under consideration is known as fiscal drag, a mechanism that effectively increases tax burdens without raising headline rates. As pay rises tip workers into higher tax bands, they end up paying more tax overall. This occurs because the tax-free personal allowance remains static, failing to rise in line with inflation each year.

The impact of fiscal drag extends beyond just income tax, it also affects savers, who are now typically earning higher interest rates on their savings compared to previous years.

As a result, those with non-Isa savings are using up their personal savings allowances more quickly.

Tom Selby, retirement expert at AJ Bell, said: "This is an inevitable consequence of the deep freeze on income tax thresholds and something all savers need to be aware of."

With higher interest rates, savers are earning more on their deposits than in recent years.

There has been a surge in the popularity of tax-free cash Isas as savers attempt to shield their money from any changes ahead of the Budget on Wednesday. However, those with savings outside ISAs are finding their personal savings allowances depleted more rapidly.

A range of middle-income professionals, including police officers, accountants, and civil engineers, are expected to be pushed into the 40 per cent tax bracket as their earnings grow.

Given the potential impact of fiscal drag on savings, experts are advising savers to utilise Isas to protect their money from tax increases.

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The number of savers maxing out their annual tax-free Isa allowance increased by over 300 per cent 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.

Selby added: "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."