As many as 3.5 million savers have paid double the amount of tax on their savings in 2009 and 2010, figures from HM Revenue & Customs (HMRC) have revealed.
Instead of paying a 10% rate of tax on savings, HMRC data showed that up to 3.5 million people were subjected to the automatically deducted rate of 20%.
While this deficit could have been reclaimed by millions, just 718,000 have applied to have the tax rebated.
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“The way in which savings are taxed needs to change. They system is inequitable and unfair. The way in which lower rates – designed to help those on lower incomes – operate is poorly understood, bureaucratic and ineffective,” said Simon Rose, a spokesman Save our Savers.
“Better-off savers are given generous credit terms to pay the tax they owe on their savings, whilst pensioners and others on low incomes have to overpay immediately, then have to fill out various forms to reclaim their own money.”
The savings pots of low income pensioners have been hit the hardest, with a recent Parliamentary report arguing that up to 2.4 million pensioners have overpaid tax on their savings.
Save Our Savers argue that this is an issue that should be resolved by the government, who should act to “remove income tax on savings income.”
For the 2012-13 tax year the personal allowance is £8,105, rising to £10,500 for those aged 65-74 and £10,660 for those aged 75 and over.
If your combined total income, including earnings or pension and interest paid on savings and investments, is below this figure then you can complete an R85 form.
This means that you can avoid having the 20% tax deducted from your savings interest in the future.
You can compare savings accounts with Money Expert.