As the Government continues its efforts to get public finances under control, new figures from HM Revenue and Customs (HMRC) show that more than 2.6 million people face a tax bill on their savings in the 2025/26 tax year.
In fact, HMRC expects around 2.64 million savers to be affected, an increase of over 120,000 compared to last year.
A recent report has revealed that the average tax bill for savings interest this year sits at around £2,300, highlighting just how much of an impact this could have on people who’ve been carefully putting money aside.
According to estimates, HMRC is set to collect more than £6 billion from savers this year alone, a worrying statistic given the current economic uncertainty that is already putting household savings under strain.
Why are more people being taxed on their savings?
Two key factors are driving the increase in liable savings taxpayers. They are frozen tax thresholds and rising interest rates.
Tax bands have been frozen until 2028, so as wages go up and people save more, more of their income and the interest earned on it falls into taxable brackets.
It’s a form of ‘stealth tax’ that quietly pushes more savers into tax-paying territory without any changes to the rules.
We may get some clarity in the Autumn Budget, where Chancellor Rachel Reeves could review income tax thresholds as part of broader economic reforms. For now, though, it remains speculation.
At the same time, interest rates remain high. The Bank of England base rate currently stands at 4.25 per cent, more than double the Government’s target of 2 per cent.
Rates have been rising steadily since January 2022, and although they’ve recently begun to edge down slightly, they’re still high enough to tip many savers over the limit.
The Bank of England is due to meet again this week, and another cut is on the cards – but it’s unlikely to make a big enough dent to stop the growing number of savers facing tax.
What is savings tax and how does it work?
When you earn interest on your savings, it’s not always tax-free. If the interest you earn pushes you over the Personal Savings Allowance (PSA), you’ll have to pay tax on the extra amount, and this is charged at your usual income tax rate.
Your Personal Savings Allowance varies depending on your income. If you are basic taxpayer, you can earn up to £1,000 in interest tax-free. However, additional rate taxpayers earning over £125,140 do not receive any allowances.
There are multiple savings tax avenues including your This tax doesn’t just apply to your regular savings account as well as interest from current accounts, peer-to-peer lending, government bonds and savings interest from credit unions.
That’s why it’s crucial to keep a close eye on where your money is saved and how much interest it’s generating. Even if you think you’re comfortably within the threshold, a rise in rates or a larger deposit could push you over.
What are options are available?
No one wants to see their hard-earned savings chipped away by taxes. Fortunately, there are some practical steps you can take to reduce your exposure.
One of the simplest and most effective ways to protect your savings from tax is by using an Individual Savings Account (ISA). You can save up to £20,000 each year in a cash or stocks and shares ISA, and any interest earned is completely tax-free.
If your savings are in a variable-rate account, it’s worth checking regularly to see if rising interest rates might push your returns over the threshold. A fixed-rate account, on the other hand, locks in your interest – so you’ll know in advance how much you’ll earn.
Interest can be paid monthly, annually, or at the end of a fixed term so it’s important you know when the interest is paid on your accounts.
If you hold multiple accounts, you may be able to spread the timing of these payments to stay below the Personal Savings Allowance in any single tax year.
Concerned about your savings?
If you’re unsure whether your savings could be affected or you’ve already had a surprise tax bill, it’s worth seeking legal and financial advice.
Finance experts can help you calculate whether you’re close to the savings threshold, recommend strategies to protect your savings or limit any damage and guide you through the latest rules and allowances.
It is important to move proactively to ensure the damage to your savings if any, is minimal. In addition to this, understanding your financial position can help you make decisions.
Have a query about your savings? Speak with our expert team today for clear, personalised support.
