Millions of savers across the United Kingdom are being urged to review their savings arrangements after a significant increase in tax bills from HM Revenue and Customs (HMRC). Recent data shows the number of individuals paying tax on their savings interest has risen sharply within the past three years.
Financial experts advise UK residents to take action promptly to avoid unexpected charges, as static Personal Savings Allowances (PSA) and competitive interest rates are pushing more people above tax-free thresholds.
Surge in taxpayers facing savings tax
Figures obtained by Paragon Bank through a Freedom of Information request to HMRC show a rapid escalation in the number of UK taxpayers subject to tax on savings interest.
The number has more than doubled from 1.27 million in 2022/23 to a projected 2.79 million in 2025/26, according to the data provided. Analysts point to a combination of higher interest rates and frozen tax allowances as the key drivers of this trend.
Impact on basic rate taxpayers
The increase is particularly acute among basic rate taxpayers. Government data indicates that those in the 20% tax band subject to tax on savings interest has surged by 132%, from 613,000 in 2022/23 to an estimated 1.42 million in 2025/26.
On average, basic rate taxpayers are expected to face a tax bill of £641 on their savings interest this year. The static PSA of £1,000 has not risen in line with increasing bank rates, resulting in more savers exceeding their tax-free limits.
Higher and additional rate taxpayers affected
Those on higher and additional rates of income tax are also feeling the effects. The number of higher-rate taxpayers (40%) owing tax on savings interest is forecast to grow from 387,000 to 883,000 in the same period, with the typical payment reaching approximately £2,030.
Additionally, the number of additional rate taxpayers (45%) being taxed on their savings interest is expected to rise to 479,000 in 2025/26, from 271,000 in 2022/23, facing average bills of £6,990.
These increases coincide with changes in interest rates following the 2022 mini-budget and persistently high inflation.
Personal Savings Allowance and changing thresholds
The Personal Savings Allowance allows basic rate taxpayers to earn up to £1,000 of interest tax-free per tax year. For higher-rate taxpayers, the PSA is limited to £500, while additional rate taxpayers receive no allowance.
This means those with modest savings and average returns can quickly exceed their thresholds, becoming liable for tax.
The continued freeze on income tax brackets and the PSA has resulted in more pensioners and mature savers being drawn into the tax net, with individuals aged over 65 expected to pay £2.5 billion in tax on savings in 2025/26.
Importance of cash ISAs for savers
Cash Individual Savings Accounts (ISAs) are gaining renewed focus as a means for savers to shield interest from tax.
Current regulations allow up to £20,000 to be saved in a cash ISA each tax year, with all interest earned remaining free from income tax regardless of the saver’s personal circumstances or changes to the PSA.
Financial experts recommend fully utilising this allowance before the tax year ends on 5 April 2026 to maximise benefits amid competitive interest rates.
Final Summary
In summary, rising interest rates and unchanged tax thresholds have led to a surge in UK savers paying tax on their savings, with the basic rate taxpayer group seeing the largest increase in numbers and liability.
Pensioners, in particular, are at risk, facing substantially higher tax bills as more of them surpass tax-free allowances. Experts advise making use of cash ISAs and staying alert to impending rule changes due to take effect in 2027.
For those managing their finances, digital tools such as the Pie tax app can offer guidance and help calculate potential tax liabilities in advance of receiving HMRC notifications.
