Pensioners could receive a letter from HMRC (Image: Getty Images)
Thousands of retirees could face a tax bill on their savings accounts this year, a bank has warned. Frozen personal allowance rates and rising interest rates mean more people than ever are being drawn into paying tax on their savings.
Paragon Bank warned that more than 1.4 million basic-rate taxpayers face an average bill of £641 this financial year. The increase in basic-rate taxpayers dragged into the net has been driven by retirees, according to the bank. Andrew Wright, head of savings at Paragon Bank, said: “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.”
Making sure your savings are in the best place to maximise them is crucial (Image: Getty Images)
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He adds: “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.
“More mature savers value the stability of cash and have saved prudently over many years to build financial resilience, so it’s unfair they are being punished through a tax system not initially designed for them.”
Figures released under a Freedom of Information request show that the number of individuals incurring tax on their savings has more than doubled in just three years, increasing from 1.27 million in 2022/23 to 2.79 million in 2025/26.
Basic rate taxpayers in particular are being pulled into tax liability, rising from 613,000 in 2022/23 to 1.42 million in 2025/26, a 132% increase.
The Government’s data shows that, on average, savers in that tax band will pay an estimated £641 income tax on average on their savings.
Mr Wright added: “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 tax-free status of ISAs means savers keep every pound of interest they earn, providing certainty and protection at a time when allowances are frozen and interest rates remain competitive.”
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Paragon Bank says the ISA wrapper is one of the best routes for shielding returns from tax (Image: Getty Images)
He says: “The 132% rise in basic‑rate taxpayers paying tax on savings interest is likely being driven by retirees, people with modest incomes but meaningful savings balances.
“Our separate FoI request shows individuals aged 65 plus are forecast to pay £2.5 billion in tax on their savings interest in 2025/26, a 215% increase on 2022/23.”
With savings rates remaining competitive and the Personal Savings Allowance (PSA) frozen, more savers are breaching the tax-free threshold, resulting in their interest being taxed at 20%, 40% or 45% depending on their income band.
The FOI findings show that as interest rates rose following the 2022 mini-Budget, the number of higher-rate taxpayers paying savings tax increased from 387,000 in 2022/23 to 883,000 in 2025/26, with the average payment for this tax year expected to be £2,030.
Nearly half a million additional rate taxpayers are also expected to pay tax on savings this tax year (479,000), compared to 271,000 in 2022/23, with the average bill forecast at £6,990.
Cash ISAs currently allow individuals to put away up to £20,000 per year tax-free. The rules will change in 2027, when people aged under 65 will have their annual Cash ISA allowance cut to £12,000. People aged 65 and over will retain their full £20,000 allowance.
With more customers building higher balances amid improved savings conditions, the ISA wrapper remains one of the most effective ways to shield returns from tax.
