HM Revenue & Customs (HMRC) is poised to charge over two million UK households an average of £2,300 in tax on their savings, according to recent data. A Freedom of Information request has revealed that the number of people paying tax on savings is expected to soar to 2.64 million in the 2025/26 tax year, a sharp increase from just 647,000 in 2021/22.
Data obtained by AJ Bell shows that savers are facing an average effective tax rate of around 31% on their interest income. Laura Suter, AJ Bell’s head of investment analysis, explained, “While tax is levied at individual marginal rates of 20%, 40%, or 45%, the average effective rate reflects what most people actually pay after taking tax-free allowances into account.”
The surge in taxable savings income results from rising interest rates combined with frozen tax bands. This situation has created a financial windfall for HMRC at a time when public finances are under pressure. UK savers are predicted to earn approximately £20 billion in interest from non-ISA cash accounts this year—more than four times the amount earned five years ago.
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“Although this increase has been beneficial for savers, it has also significantly boosted tax revenues,” Suter added. HMRC expects to collect over £6 billion from savings income tax in the current tax year.
To understand the tax implications, it’s important to consider existing allowances. The Personal Allowance lets most individuals earn up to £12,570 tax-free from all sources, including salary, pension, and savings interest. If your total income is below this threshold, your savings interest remains untaxed.
Additionally, the Starting Rate for Savings allows some to earn up to £5,000 in savings interest tax-free, provided that combined income from salary and interest does not exceed £18,570. However, for every £1 of non-savings income above the Personal Allowance, the Starting Rate for Savings reduces by £1.
On top of these, the Personal Savings Allowance (PSA) provides further relief. Basic rate taxpayers (20%) can earn £1,000 in interest tax-free, while higher rate taxpayers (40%) get a £500 allowance. Those paying the top tax rate (45%) do not receive a PSA.
With interest rates climbing and tax thresholds frozen, many savers now face unexpected tax bills on their interest income, highlighting the importance of understanding these allowances to manage tax liabilities effectively.