Warning for Savers: 300,000 More People to Pay Tax on Their Savings

Savers across the UK are facing a financial wake-up call. A new report warns that an additional 300,000 people will be dragged into paying tax on their savings interest this year. This is due to rising interest rates and unchanged tax thresholds.

What’s Behind the Tax Increase?

The main cause is higher savings interest rates. Banks and building societies have increased rates to keep up with the Bank of England’s base rate. This means savers are now earning more interest than they were in previous years.

While this sounds like good news, there’s a catch. More interest means more income—income that could exceed the tax-free limit and become taxable.

The Personal Savings Allowance Explained

The Personal Savings Allowance (PSA) allows basic rate taxpayers to earn up to £1,000 in interest each year without paying tax. For higher-rate taxpayers, the limit is only £500. Additional-rate taxpayers don’t receive a savings allowance at all.

These thresholds have not changed since they were introduced in 2016. However, with interest rates now above 4%, it’s much easier to reach or exceed these limits—especially if you have substantial savings.

More Tax Bills for Ordinary Savers

According to recent forecasts, around 2.7 million people are expected to pay tax on their savings in 2025. This is up from 2.4 million last year. That means an extra 300,000 savers will face tax bills for interest earned on their accounts.

Many of these people have never paid tax on savings before. The change could come as a surprise—especially for pensioners and low-income households who rely on savings interest.

Inflation and Frozen Thresholds Hit Hard

While interest earnings have risen, income tax thresholds have been frozen. At the same time, inflation has eroded the value of money. This double hit is pushing more savers into taxable territory, even though their overall wealth hasn’t significantly increased.

It’s a clear example of fiscal drag—where tax bands stay the same while incomes and returns grow, quietly pulling more people into the tax net.

What Can Savers Do?

There are ways to reduce your tax burden. Using ISAs (Individual Savings Accounts) is one of the most effective options. Interest earned inside an ISA is completely tax-free. Every adult can save up to £20,000 per tax year in ISAs.

Also, make sure your savings are spread wisely. Couples can use both allowances by saving in separate accounts. Reviewing your account types and interest rates can also help you stay under the tax-free limit.