According to analysis by Paragon Bank via a Freedom of Information request, the number of people paying tax on their savings has risen from 1.27 million in 2022-23 to 2.79 million in 2025-26. Yorkshire Building Society analysis of HMRC data indicates taxpayers will have paid £28 billion in tax on the interest on their savings since 2016 by the end of the 2025-26 tax year. Basic rate taxpayers alone have paid more than £4.7 billion in tax on their savings interest over the past decade, according to the same analysis. Andrew Wright, Head of Savings at Paragon Bank, said that more people than ever are being drawn into paying tax on their savings, and a letter from HMRC risks catching many by surprise. With the number of taxpayers on savings interest rising so sharply, it’s never been more important for savers to consider using Cash ISAs.
The Personal Savings Allowance, which allows basic rate taxpayers to earn up to £1,000 in savings interest tax-free, has been frozen since its introduction in April 2016, according to multiple reports. Additional rate taxpayers receive no PSA and are taxed on all interest earned outside tax-free accounts, sources said. Yorkshire Building Society analysis shows that in 2016, basic rate taxpayers could save around £100,000 in a typical savings account without breaching their PSA, but in 2026, with interest rates around 3%, they can only save around £33,000. Rachel Springall, a finance expert at Moneyfactscompare.co.uk, noted that Cash ISAs have proven their worth to savers over many years, especially as fiscal drag causes millions to breach their Personal Savings Allowance. April marks the 10-year anniversary of the PSA, and while it protected savings interest from tax when it was launched for many, it’s outdated and needs to change.
Fiscal drag is causing more savers to breach their PSA due to frozen allowances and higher interest rates, according to multiple reports. The personal allowance, the income tax-free threshold, is £12,570 and has been frozen since 2021, with the freeze extended to 2031, according to money saving expert Martin Lewis. Income tax thresholds are frozen, pushing more workers into higher rate bands where the PSA is halved, sources said. Martin Lewis explained that the personal allowance is £12,570 a year that you can earn from any source, earnings, rent, savings, interest without paying tax on. Most people get that unless you start earning over £100,000 when it’s taken away.
Yorkshire Building Society research found that 36% of people have never heard of the Personal Savings Allowance. There is also a starting rate for savings allowance of £5,000 for people with low work earnings but high interest on savings, often retirees, according to Martin Lewis. He described that the starting rate for savings is another £5,000 of savings interest you can earn a year on top of the personal allowance. And this is designed for people who have low work earnings but high interest on savings. Often people who are retired. It remains unclear what the current awareness level is among savers about this starting rate allowance, or how many are utilizing it.
Practical examples illustrate the tax implications. Moneyfactscompare.co.uk analysis shows that a £20,000 deposit in a top one-year bond paying 4.58% would earn £916 in interest, breaching the £500 PSA for higher rate taxpayers and coming close to the £1,000 limit for basic rate taxpayers. The same £20,000 in a top cash ISA paying 4.45% would earn £890 completely tax-free, according to the analysis. Tina Hughes, Director of savings at Yorkshire Building Society, remarked that these aren’t wealthy investors — they’re people putting money aside for a house deposit, families saving for their children, or those planning a well-earned holiday.
Context for rising savings needs comes from Yorkshire Building Society data showing the median average house deposit has increased from £25,000 in 2016 to £36,500 in 2024-25, a 46% increase. Andrew Wright of Paragon Bank added that many pensioners depend on savings interest to support their income, but frozen income tax thresholds and unchanged Personal Savings Allowances are pulling more people into a part of the tax system originally designed for wealthier individuals. With tax on savings income due to increase from April 2027, that pressure will only intensify at a time when households are still contending with the effects of inflation. The government has not specified what policy changes, if any, are being considered to address the outdated Personal Savings Allowance, and it is unknown how many savers will be affected beyond 2025-26 or the breakdown of the £28 billion in tax by tax band.