Any gains in interest rates increasing will be lost by increasing tax bills and many people will be worse off, say leading tax and advisory firm Blick Rothenberg.

Paul Haywood-Schiefer, a Senior Manager at the firm said: “Whenever interest rates rise, investors see a higher return on their money. Whilst that is beneficial to them, it will form part of taxable income and may need to be reported and tax paid on it via self-assessment”

He added: “Whilst a rise in credit interest rate is money in the pocket, the same cannot be said for the debit interest rate, and the former tends to move a lot less than the latter. An increase in the cost of borrowings will hurt a wide range of taxpayers.”

Paul explained: “An increase in the Bank of England (BOE) base rate will be reflected in HMRC’s late interest payment rates and so anyone with outstanding tax to pay will see an increase in the amount of interest due on their underpayments. This will be particularly pertinent to those in self-assessment who may have reduced payments on account based on expected reduced income, especially those who were affected by the Covid pandemic and saw a downturn in profits during that period.”

Paul said: “Similarly, following Covid’s impact, HMRC allowed thousands to use HMRCs time to pay arrangements to pay tax in instalments. An increase in interest rates now could see them needing some recalculations to clear the outstanding amounts due to HMRC to ensure this is cleared in the prescribed period of the agreement.”

He continued: “Another knock-on effect of this will be in relation to landlords who have taken out mortgages/loans on rental properties. Increased interest costs are not something that can immediately be remedied by a straight tax deduction as since April 2020 the amount of relief that private landlords could claim on finance costs, including loan interest is only a basic rate tax deduction (currently 20% of the actual expense). Therefore, only 20p in every £1 of additional interest would be relievable, which might in turn make the landlord consider an increase in the rent charged to cover this.”

Paul added: “Only those running their property business through a company or as a furnished holiday let are still able to claim full deduction on interest, so an increase in the interest just creates a higher deduction against the taxable profits of the property.”

Paul continued: “There are others who will be affected. Anyone with an employment related loans that were taken out with variable terms, or who may even have an interest free loan will see the increase in HMRCs official rate of interest affecting the amount to be paid back or the value of the taxable benefit in kind on this loan.”

Paul said: “However, the biggest issue here for everyone is that the Chancellor has already confirmed that the tax rate bands, and tax-free allowances will be frozen until April 2026 and has additionally now introduced the Health & Social Care Levy, which will further add to a taxpayer’s burden.”

He added: “Whilst receiving higher interest is beneficial, the lack of movement on the tax rate bands and allowances mean that any increases in income will bring more into the tax charge over the next few years. The fiscal drag this creates is going to be felt by everyone for the next five years.”