Rishi Sunak has been accused of “shattering dreams” by hitting savers with a “thrift tax” that will boost Treasury coffers by billions.
It will put the amount going to the Chancellor on course to multiply fivefold since the start of the decade.
People who have put aside savings are expected to pay out £7.6billion as a result of frozen thresholds and the increase in interest rates.
Tax on savings interest raised just £1.4billion in 2020-21.
But more than 1.2 million people are now expected to pay tax for the first time on money they have put away.
Basic rate taxpayers can only earn up to £1,000 in interest before having to pay tax. Higher earners have a limit of just £500.
This means homeowners who face forking out hundreds more each month in mortgage payments may also be hit with an unexpected tax bill on their savings.
John O’Connell, chief executive of the Taxpayers’ Alliance, urged the Government to find ways of giving people “breathing room”.
He said: “Savers are receiving a raw deal with inflation eating away at their hard-earned cash.
“An unprecedented cost-of-living crisis is helping to drive up prices and has sent taxes soaring, meaning every penny left in pay packets is precious.”
And John Longworth, a former director-general of the British Chambers of Commerce, did not hide his frustration with Chancellor Jeremy Hunt’s policies.
The man who now leads the Independent Business Network said: “This administration would put a Communist government to shame in its determination to squeeze every penny out of people’s pockets.
“Not since King John have we faced such a rapacious lot in power.
“Good people have paid tax on their earnings and then save for their future and that of their children. Mr Hunt then thinks it justified to heavily tax those savings again.”
He said this was “all very well for the millionaires” in Downing Street but was “truly a tax on thrift”.
Craig Mackinlay, a Conservative MP and chartered accountant, said savers could avoid tax by using ISAs.
But he encouraged the Government to re-assess tax thresholds “across interest and small dividend receipts”.
The representative for South Thanet said: “Savers have had a tough decade under an unnaturally low interest rate environment.
“While higher interest rates are toxic to mortgage holders, the flip-side will be positive for savers, especially for those who shop around.
“What won’t be so welcome is the tax charge if modest amounts of interest are earned which could also mean people being forced to complete burdensome self-assessment tax returns.
“The freezing of thresholds and the amount of interest able to be earned, unchanged since 2016, means another ‘windfall’ tax to the Treasury.”
Robert Oulds, a director of think tank the Bruges Group – whose founder president was Margaret Thatcher – warned people’s dreams were being ripped apart on the Prime Minister’s watch.
He said: “Savers are being hit by a Sunak triple-whammy made in Downing Street: higher prices reducing the value of their hard-earned savings; the thrift tax; and higher mortgage costs.
“People are being punished for being responsible and doing the right thing.
“Rishi Sunak is shattering dreams.”
But the Treasury argues around 95 percent of taxpayers pay nothing on their savings interest, with those who take out ISAs benefiting from an annual £20,000 tax-free allowance.
A spokesman said: “The Chancellor was clear last week it is taking too long for increases in interest rates to be passed on to savers.
“That’s why we are working with banks and regulators about the best way to achieve that and to support consumers during this period of high inflation and interest rates.”
“Ultimately, the best way to help savers is to drive down inflation.
“We have a clear plan to halve it by the end of the year and get it back down to two percent thereafter.”
The concern about taxes on savings comes as figures show more people than ever before – 862,000 – will pay the “additional rate” of tax.
The threshold for the 45p rate fell in April from £150,000 to £125,140.
And the freeze in basic and higher rate thresholds until 2028 is expected to create 3.2 million more taxpayers.
