LAST REVIEWED: 12 JUNE 2026
TL;DR: More UK savers are receiving tax bills on interest earned in savings accounts. The cause is a combination of higher savings rates since 2022, frozen income tax thresholds, and a Personal Savings Allowance that has not changed since 2016. Basic-rate taxpayers can earn up to £1,000 in interest tax-free; higher-rate taxpayers only £500. ISAs remain the most straightforward way to shelter savings from tax.
Thousands of UK savers who previously paid no tax on their interest are now receiving correspondence from HMRC asking them to settle an unexpected bill. The trend, which has accelerated since interest rates began rising in 2022, reflects the interaction between three overlapping factors: higher savings rates, frozen income tax thresholds, and an allowance structure that has not kept pace.
How the Personal Savings Allowance Works
The Personal Savings Allowance (PSA) was introduced in April 2016. It allows savers to earn a set amount of interest each tax year without paying income tax on it. The allowance depends on the income tax band the individual falls into.
Basic-rate taxpayers (those paying 20% income tax) can earn up to £1,000 in interest tax-free per year. Higher-rate taxpayers (40%) have a reduced allowance of £500. Additional-rate taxpayers (45%) have no PSA at all and pay tax on all savings interest from the first pound.
Interest earned above those thresholds is taxed as income, at the taxpayer's marginal rate.
Why Bills Are Rising Now
When the Bank of England base rate sat close to zero between 2009 and 2022, even savers with large balances rarely earned enough interest to breach the PSA. A saver would have needed over £100,000 on deposit at typical rates to generate £1,000 in interest.
That calculation has changed substantially. With the base rate having reached 5.25% in 2023 before falling back, many easy-access and fixed-rate accounts have paid well above 4%. A saver with £25,000 in an account paying 4.5% would now earn £1,125 in annual interest, enough to exceed the basic-rate PSA and create a tax liability on the excess.
The income tax threshold freeze compounds the problem. The personal allowance has been fixed at £12,570 since April 2021 and is scheduled to remain there until at least April 2028. As wages have risen with inflation, more individuals have been pushed into the higher-rate band, halving their PSA from £1,000 to £500 without any change in their savings behaviour.
Pensioners are particularly affected. Research published via a Freedom of Information request found that people over 65 account for approximately 44% of all taxpayers receiving a bill for savings interest.
How HMRC Collects the Tax
HMRC receives information about interest payments directly from banks and building societies. For most employed savers, HMRC adjusts the tax code at the start of the following tax year so that the liability is collected through payroll under PAYE.
Savers who do not pay through PAYE, including self-employed individuals and retirees not in PAYE employment, may need to complete a Self Assessment return if their total savings income is significant. HMRC also sends Simple Assessment letters to some taxpayers, setting out what is owed and how to pay.
The Starting Rate for Savings
A separate relief exists for people with low non-savings income. The starting rate for savings is a 0% band that covers up to £5,000 of savings interest. It is only available where total non-savings income (employment, pension, or self-employment income) falls below £17,570. For savers whose main income is modest, this can significantly reduce or eliminate a tax liability.
Ways to Reduce a Savings Tax Bill
The most effective action is to use an Individual Savings Account. Interest earned within a Cash ISA is free from income tax, regardless of the amount. The annual ISA allowance is £20,000 for 2025-26. Existing savings outside an ISA can be gradually transferred into one in future tax years to shelter future returns.
Premium Bonds issued by National Savings and Investments do not pay interest. Instead, they offer tax-free prizes drawn each month. Returns are not guaranteed but the effective rate on large holdings has been competitive compared with taxable savings accounts at current rates.
For higher-rate taxpayers who have exhausted their ISA allowance, pension contributions can reduce adjusted net income and in some cases push an individual back into the basic-rate band, doubling the PSA.
Frequently Asked Questions
How much savings interest can I earn tax-free?
Basic-rate (20%) taxpayers can earn up to £1,000 per year in savings interest without paying tax. Higher-rate (40%) taxpayers have an allowance of £500. Additional-rate (45%) taxpayers have no allowance.
Will HMRC automatically collect tax on my savings interest?
For most PAYE workers, yes. HMRC adjusts the tax code to recover the liability through payroll. Self-employed individuals and retirees outside PAYE may need to declare savings income through Self Assessment.
Is interest on a Cash ISA taxable?
No. Interest earned within a Cash ISA is entirely free from income tax, regardless of the amount earned.
What is the starting rate for savings?
The starting rate for savings is a 0% tax band on up to £5,000 of savings interest. It applies only if total non-savings income is below £17,570 in the tax year.
