Finance experts have advised savers to do one thing before April (Image: Getty)
More than one million basic-rate taxpayers face a hefty tax on their savings accounts this year, a bank has warned. Financial experts have urged savers to act before the tax year ends to avoid the bill. A Freedom of Information (FOI) request from Paragon Bank showed that over 1.4 million basic rate taxpayers, who include those who earn more than £12,570 and under £50,270, are set to incur an average tax bill of £641 on their savings interest.
Savings rates currently remain competitive, and the Personal Savings Allowance (PSA) has remained frozen. This means more savers are incurring tax as they earn more on their savings. The PSA allows basic-rate taxpayers to earn up to £1,000 interest on their savings without paying tax, while higher-rate taxpayers can earn just £500. Additional rate taxpayers don’t have an allowance – all savings interest is taxed. Andrew Wright, head of savings at Paragon Bank, said: “More people than ever are being drawn into paying tax on their savings, and a letter from HMRC risks catching many by surprise. With the number of taxpayers on savings interest rising so sharply, it’s never been more important for savers to consider using Cash ISAs.
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“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.”
Paragon Bank’s FOI request showed that the number of individuals subject to tax on their savings has more than doubled in just three years, shooting up from 1.27 million in 2022/23 to 2.79 million in 2025/26.
Basic rate taxpayers are being pulled into paying more tax, rising from 613,000 in 2022/23 to 1.42 million in 2025/26 (132%).
Mr Wright added that the rise in basic‑rate taxpayers paying tax on savings interest is “likely being driven by retirees”, as well as 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,” he revealed.
ISA form with a pen and calculator (Image: Getty)
“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.
“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.”
Brits have been urged to check if they can benefit from a Cash ISA. A Cash ISA allows savers to earn tax-free interest on up to £20,000 per year.
Rachel Reeves recently announced a change to the Cash ISA limit, slashing it from £20,000 per year to just £12,000. However, this does not come into effect until April 7, 2027. Plus, those over 65 will still enjoy the higher limit.
The Chancellor made the move to encourage more people to invest their savings. Stocks and Shares ISAs typically provide better returns in the long run, but many savers prefer the safety of a Cash ISA.
Paragon Bank’s FOI request also showed 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. The average payment amounted to £2,030.
Meanwhile, nearly half a million (479,000) additional rate taxpayers are expected to pay the average bill of £6,990. This marks a significant increase compared to just 271,000 in 2022/23.
