Frozen allowances and inflation ‘double blow’: 300,000 additional UK savers may be forced to pay tax!
- TBA
- Aug 29
- 4 min read
Against the backdrop of high taxes and rising living costs in the UK, many people choose to build up their wealth through savings interest or investment products.
What some may not realise, however, is that while savings capital itself is not taxed, the interest earned on savings is subject to taxation – this is known as the tax on savings interest.
In recent years, the tax burden on British savers has grown heavier.
According to the latest data, around 300,000 savers will pay tax on their savings for the first time. The main reason behind this surge is the effect of ‘fiscal drag’.
Sharp increase in taxpayers among savers
The Nottingham Building Society, using data obtained under the Freedom of Information Act, revealed that in the 2025/26 tax year the number of savers paying tax has risen from 3.06 million in 2020/21 to 3.35 million. This means an additional 300,000 savers will for the first time be liable to pay tax on their savings interest.
The key driver of this change is ‘fiscal drag’.
Since the government has frozen income tax thresholds, even modest increases in nominal income caused by inflation can push savers into higher tax brackets, requiring them to pay tax on their savings interest.
For example, in the 2025/26 tax year:
The basic rate threshold is £12,570
The higher rate threshold is £50,270
The additional rate threshold is £125,140
As wages rise, many savers’ nominal incomes now exceed these frozen thresholds, which in turn triggers a liability to tax on their savings interest.
How savings interest is taxed
Your liability for tax on savings interest depends on your total income in a given tax year (6 April to 5 April the following year) and the allowances you are entitled to. These include:
Personal Allowance
Starting rate for savings
Personal Savings Allowance
Personal Allowance
In 2024/25 the standard Personal Allowance is £12,570. If your total income (including wages, pensions and savings interest) does not exceed this amount, you will not have to pay tax.
However, if your income exceeds £100,000, the allowance is reduced. For every £1 above £100,000, your Personal Allowance is reduced by £1.
Starting rate for savings
For savers with annual incomes between £17,570 and £50,270, up to £5,000 of savings interest can be tax-free each year.
This allowance is calculated after the Personal Allowance (£12,570). The higher your non-savings income, the less of this starting rate you can claim. For every £1 your non-savings income exceeds the Personal Allowance, your £5,000 starting rate is reduced by £1.
Example 1 – full benefit of £5,000 allowance:
Salary: £12,000
Savings interest: £4,000
Since the salary is below £12,570, it is fully covered by the Personal Allowance. Non-savings income is under £17,570, so the full £5,000 starting rate applies. The £4,000 interest is fully tax-free.
Example 2 – partial or no allowance:
Salary: £22,000
Savings interest: £4,000
Here, non-savings income exceeds £17,570 by £4,430. The £5,000 starting rate is reduced by £4,430, leaving only £570 tax-free. Therefore, £3,430 of savings interest is taxable.
Personal Savings Allowance
On top of the starting rate, you may also qualify for a Personal Savings Allowance depending on your tax band:
Basic rate taxpayers: £1,000
Higher rate taxpayers: £500
Additional rate taxpayers: £0
This means anyone earning over £125,140 will pay tax on all savings interest.
Finally, if your income from savings and investments exceeds £10,000, you must register for Self Assessment and declare it to HMRC.
How to reclaim overpaid tax on savings interest
If you discover you have overpaid tax on savings interest, you can reclaim it – but you must apply within four years of the end of the relevant tax year.
If you complete a Self-Assessment Tax Return, you can claim through the return itself. Otherwise, you need to complete form R40 and submit it to HMRC. Repayments usually take around six weeks.
How to reduce tax on savings
To enjoy more tax benefits on savings, consider diversifying your investments.
For example, transferring some savings into an Individual Savings Account (ISA). The annual ISA allowance for 2025/26 is £20,000.
If you are married and your spouse has a lower income, you might also consider holding savings in their name to take advantage of their Personal Allowance and Personal Savings Allowance.
Some advice from TB Accountants
It is important to remember that the way tax-free allowances apply to savings interest can vary depending on your individual circumstances.
If you have no employment income and no pension income:
Banks or building societies will report your interest to HMRC, who will then inform you if you need to pay tax.
If you are employed or receive a pension:
HMRC may adjust your tax code so that the correct tax is collected automatically.
They do this by estimating the amount of interest you are likely to receive, based on the previous year, and then issuing a tax calculation notice to confirm whether you have underpaid or overpaid.
With 16 years of experience in UK personal and corporate taxation, we can provide bespoke tax solutions for your needs.
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