Millions face savings tax bills due to decade-long allowance freeze – how to shield your savings
Millions of Brits could face savings tax this year as their interest earned exceeds the personal savings allowance. Are you at risk?
Daniel Hilton
Millions of savers in the UK are being dragged into paying tax on their savings interest because the personal savings allowance (PSA) has been frozen for a decade, according to new research.
By the end of the 2025/26 tax year, taxpayers will have paid over £28 billion in tax on their savings interest since the PSA was launched, with basic rate taxpayers alone paying £4.7 billion, analysis of HMRC data and forecasts by Yorkshire Building Society found, outlining the impact of a policy that has been unchanged since it was introduced in 2016.
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The landscape for savers has materially changed over the past decade. When the personal savings allowance was introduced on 6 April 2016, the majority of easy access accounts paid 1% or less. Now most pay 3% or less. This means while in 2016 basic-rate-tax payers would have been able to put away as much as £100,000 in a typical savings account, in 2026, with interest rates hovering around 3%, savers would only be able to save around £33,000 without breaching their allowance. For those earning over £50,271 and paying higher-rate tax, that amount would fall to around £16,000.
At the same time people need bigger savings nest-eggs to be able to reach ordinary milestones. The median average house deposit has jumped from £25,000 in 2016 to £36,500 in 2024/5 – an increase of 46%, according to the English Housing Survey Headline Report.
Tina Hughes, director of savings at Yorkshire Building Society, said: “Ordinary people are being penalised by a system that simply hasn’t kept pace with reality. 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.
Millions at risk of 'unnecessary' tax bill
Basic rate taxpayers (who earn between £12,571 and £50,270) in the UK hold £516 billion in non-ISA savings accounts that have large enough balances to breach the personal savings allowance, separate data from Paragon Bank showed in November 2025.
The personal savings allowance shields some taxpayers from having to pay income tax on savings interest – basic rate taxpayers can earn up to £1,000 a year in savings interest, while the allowance is £500 for higher rate taxpayers.
However, 5.2 million UK savings accounts owned by basic rate taxpayers were on track to earn more than the £1,000 allowance in interest in 2025, the data shows, leaving them with a 20% tax bill on the savings interest above the threshold.
The problem becomes even worse for higher rate taxpayers.
Higher rate taxpayers (people who earn between £50,271 and £125,140) have their personal savings allowance cut by half, leaving them with just £500 of tax-free savings interest outside an ISA.
Nine million UK non-ISA savings accounts owned by higher rate taxpayers, worth over £632.7 billion, were expected to earn more than £500 in interest in 2025, Paragon’s research shows, meaning these savers should prepare for an extra tax bill.
Additional rate taxpayers, who pay the highest rate of income tax, don’t get a personal savings allowance at all, meaning any interest they earn outside an ISA is subject to tax.
Brits who earn above the personal savings allowance in interest have increasingly helped bolster the government’s coffers. HMRC expected to generate £6 billion in income tax on savings interest in 2025, up from £2 billion in the 2022/23 tax year.
Additional rate taxpayers are expected to contribute the most (£4.2 billion), followed by higher rate taxpayers (£1.3 billion), and basic rate taxpayers (£500 million).
Andrew Wright, head of savings at Paragon Bank, said: “Savers should act now to protect their hard-earned money by moving funds into a tax-free wrapper such as a cash ISA.”
Using an ISA to shield your savings
The easiest way for UK savers to shield their savings interest from the taxman is by using an ISA.
You can put up to £20,000 into ISAs each tax year. There are different types of ISA – including cash ISAs and stocks and shares ISAs. The appeal of an ISA is that any interest or investment income earned within the ISA is shielded from the taxman.
For example, let’s assume you are a basic rate taxpayer who has built up an ISA holding of £100,000 by saving the maximum amount in a cash ISA for five years.
If you placed the entire amount into the best cash ISA on the market right now, from Plum, you could expect to earn 4.66% interest over the next 12 months.
At the end of the 12 months, assuming the interest rate did not change, this £100,000 would grow by £4,660. Because this money was held in an ISA, you would not be charged any tax on that.
However, if this £100,000 was held and grown in a non-ISA savings account, the £4,660 earned would breach the £1,000 personal savings allowance, meaning £3,660 of your interest earned would be taxable. You would therefore pay the government £732 in tax.
Adult cash ISA balances surged in 2025 as savers moved to protect tax‑free returns ahead of the Autumn Budget, with Paragon Bank analysis showing cash ISA balances increasing by over £50 billion as non‑ISA balances fell.
Between the end of January and end of December 2025 savers took a big shift towards tax-efficient savings ahead of the anticipated reduction in the cash ISA allowance announced in the Autumn Budget, CACI data for the period found.
Over the period, the average adult cash ISA account balance increased from £15,919 to £17,225. Meanwhile the average non-ISA account balance fell marginally from £11,919 to £11,909. The data suggests savers were seeking to maximise tax-free interest before potential ISA threshold changes in the 2025 Budget.
Total adult cash ISA balances rose by £57 billion during the period, with much of the growth driven by strong demand for fixed-term products. Overall, adult cash ISA balances in accounts totalled £436 billion across 25 million accounts at December 2025.
Fixed-term ISAs accounted for £35.8 billion of the overall increase, rising to £237.7 billion as customers locked in rates ahead of an expected reduction in interest rates. Instant access ISA balances also grew, albeit at a steadier pace, increasing by £22.4 billion to £192.9 billion.
In contrast, non-ISA balances fell by £1.8 billion over the same period to £845.6 billion across 71 million accounts. This was mainly driven by fixed-term non-ISA balances falling as savers reallocated money into tax-efficient wrappers.
Andrew Wright, head of savings at Paragon Bank, said: “2025 marked a clear shift in saver behaviour, with many people taking proactive steps to protect their returns by making greater use of tax-efficient savings. Anticipation of changes announced in the Autumn Budget encouraged savers to review where their money was held and to maximise the benefits of cash ISAs while allowances remained unchanged.
“What’s particularly notable is the strength of demand for fixed-term ISA products. Savers were not only responding to potential tax changes but also looking to lock in competitive rates amid expectations that interest rates would begin to fall. This combination of tax planning and rate certainty made fixed-term ISAs especially attractive.”
If you've used up your annual allowance, we look at other ways to shield your savings from tax in a separate guide.
