NEARLY 2million people have been hit by a little-known tax for the first time.
Anyone with a bank account where they earn interest on their savings could be hit with a surprise bill.
That's because rising interest rates mean more people are making money from the cash they've stashed away.
But make over a certain amount and you'll have to pay tax on it.
Data has revealed that 1.8million people were hit with a tax bill on cash savings interest.
The average owed to the taxman was £2,000, but the exact amount depends on the amount you earn and your tax rate.
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Many savers might not even realise they are affected.
As interest rates have been so low for so long, fewer people have been affected and many may not even be aware of it.
Everyone has a personal savings allowance – an amount they can earn from interest that's tax-free.
Over this amount and you pay tax at either 20% or 40%, depending on your income tax band.
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The annual allowance is £1,000 for those on the basic rate of tax (20%) and £500 for higher rate (40%) taxpayers.
The allowance applies to interest made from cash in most bank accounts, apart from ISAs which are tax-free.
The tax is paid either via self-assessment or deducted from income through a tax code adjustment.
Many won’t have been aware they owed tax on cash savings interest and could unexpectedly find their tax code changed by HMRC to deduct the money from their payslip.
Figures obtained by investment platform AJ Bell show that the number of savers who were penalised rocketed from 972,000 in the 2021/22 tax year to 1,770,000 in 2022/23.
Despite cash savings losing value in real terms, with the best savings rates still lagging well behind inflation, taxpayers owed HMRC over £3.4bn last year.
This means that the average bill incurred by someone stung with tax on their cash savings amounted to almost £2,000.
However, this is likely pushed higher by some wealthy individuals paying large tax bills if they hold considerable sums in cash.
With interest rates set to rise, more people could soon be dragged into paying the tax.
These figures could yet worsen as interest rates rise and the personal savings allowance remains frozen.
The government expects to make £6.6bn from the tax this year.
AJ Bell is calling on the Chancellor to end the freeze on the personal savings allowance, which has been set at the same level since 2016.
With cash interest rates now above 5% on some accounts individuals with as little as £10,000-£20,000 in cash can expect to be impacted.
Alongside recent rate rises, the freeze means even those with rainy-day savings are being hit with tax penalties.
Laura Suter, head of personal finance at AH Bell, said: "Nobody should be punished for holding a rainy day savings pot and doubling the personal savings allowance would ensure households aren’t taxed on cash savings up to £20,000, based on current rates.
"To add insult to injury, because inflation is so high, they aren’t even making a real return on their money – yet they are still being taxed.
“Until a brown letter lands on their doormat some people won’t even realise they owe tax on cash interest.
"Those filling out a self-assessment tax return will declare any savings interest, and subsequent tax due.
"But, for those taxed under PAYE, HMRC will calculate any tax due based on information sent to them by banks and building societies.
"It means many taxpayers will find there is a deduction made from their payslip each month, often before they’ve even realised they owe any money to the taxman."
Paying taxes is essential – but there are a few ways to earn up to £46,630 extra a year without giving a penny to the taxman.
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