Millions of UK savers are expected to receive tax bills on their savings interest, with recent HM Revenue & Customs (HMRC) figures indicating a sharp increase in the number affected.
Savers are being urged to review their tax position urgently, as growing numbers of workers especially those on the basic rate may be caught unaware by savings tax demands averaging £641.
The rise in interest rates, coupled with unchanged tax thresholds, has pushed more individuals over the tax-free savings allowance, prompting calls for immediate action.
Surge in Savers Facing Tax on Interest
Recent HMRC figures demonstrate that the number of people liable to pay tax on their savings has more than doubled over three years. The data shows an increase from 1.27 million savers in 2022/23 to an estimated 2.79 million in 2025/26.
This spike has been attributed to higher interest rates and static tax-free allowances, with many individuals now exceeding their Personal Savings Allowance (PSA). According to financial institutions analysing the HMRC data, over 1.4 million basic rate taxpayers are likely to face a tax bill on their savings interest in the current tax year.
This marks a significant shift in the landscape for ordinary savers, who in the past were less likely to be affected by interest taxation.
Highest Rise Among Basic Rate Taxpayers
Basic rate taxpayers have seen the most substantial increase among those incurring tax liabilities from savings. The number of affected individuals in this group is set to rise from 613,000 in 2022/23 to 1.42 million in 2025/26.
The average tax bill for these savers is expected to reach approximately £641, based on government figures. The escalation has been described by industry representatives as notable, with some pointing to retirees and those with moderate incomes but significant savings as particularly impacted.
The overall tax revenues from this demographic are rising at a swift pace, putting additional pressure on household finances.
Impact of Personal Savings Allowance
The PSA, introduced in 2016, allows basic rate taxpayers to earn up to £1,000 of savings interest tax-free annually. Higher-rate taxpayers are limited to £500, while additional rate taxpayers do not benefit from any PSA. Despite interest rate increases since 2022, PSA thresholds have not changed, leading many savers to unintentionally breach these limits.
Interest income above the PSA is subject to Income Tax at 20% for basic rate, 40% for higher rate and 45% for additional rate taxpayers.
For higher-rate taxpayers, the number facing a tax charge on savings interest is expected to more than double between 2022/23 and 2025/26, with the average bill estimated at over £2,030. Similarly, additional rate taxpayers face average bills of nearly £7,000 on their savings interest.
Changes to ISA Rules and Allowances
Cash Individual Savings Accounts (ISAs) continue to offer tax-free interest regardless of other tax changes or rate fluctuations. The current annual ISA subscription limit is £20,000.
Savers are being encouraged to make full use of this allowance before the end of the tax year on 5 April 2026. From 2027, revisions to ISA rules will take effect. The maximum permitted annual deposit into a cash ISA will decrease to £12,000, with the overall ISA allowance remaining at £20,000.
This means savers aiming to maximise their tax-free returns will need to diversify into other types of ISAs, such as stocks and shares ISAs, to utilise the full allowance.
The Challenge for Retirees and Pensioners
Older savers, particularly those aged 65 and over, are being disproportionately affected by these developments. Forecasts suggest that in 2025/26, individuals in this age group will pay some £2.5 billion in tax on their savings interest a rise of 215% since 2022/23.
Retirees often rely on interest from savings as a component of their income. However, frozen tax thresholds and the unchanged PSA are drawing more pensioners into the scope of savings tax.
This shift has prompted financial experts to raise concerns about fairness in the current tax system, particularly for those with carefully accumulated savings.
Final Summary
The sharp rise in the number of savers facing tax on their interest income is a significant development for UK households. Static tax allowances, increased returns from higher savings rates, and changes to ISA rules have prompted many to reconsider their savings strategies.
Retirees and basic rate taxpayers are among those most affected, with average tax bills and government receipts increasing year-on-year. As the landscape for savings and taxation evolves, savers are advised to stay vigilant, make full use of available allowances, and seek financial advice to reduce their tax liability where possible.
Keeping track of rule changes and acting promptly could help mitigate unexpected tax bills. For those managing their personal finances, tools like the Pie app can offer clarity and support in navigating the UK's complex tax environment.
