Savers approaching or in retirement are set to face a “dramatic” rise in the tax they pay on savings interest, according to new analysis.
An analysis of HMRC data, obtained through a Freedom of Information request by Paragon Bank, projects that savers over 65 will hand over £2.5 billion in savings interest tax in 2025/26. That represents a staggering 215% surge compared with 2022/23. Tax receipts from savers under 65 will also climb, rising 186% over the same period to £3.6 billion. However, the share of the total tax take collected from over-65s will grow from 39% to 41%.
The biggest jumps will fall on additional-rate taxpayers over 65, whose bills are expected to leap 307% to £1.1 billion. Meanwhile, higher-rate taxpayers in this age group will see a 169% rise to £885 million, and basic-rate taxpayers will pay 163% more, at £518 million.
Andrew Wright, head of savings at Paragon Bank, warned: “We’re witnessing a significant and rapid escalation in the tax burden on savers nearing or enjoying retirement. This could have a profound impact on their long-term financial wellbeing.”
The Government’s Personal Savings Allowance, which protects some savings interest from tax, has remained frozen for more than eight years.
Currently, basic-rate taxpayers can earn up to £1,000 in tax-free interest, higher-rate taxpayers up to £500, and additional-rate taxpayers receive no allowance.
With interest rates higher than in recent years, more savers are being pushed over these limits and into paying tax.
Mr Wright stressed that one way to reduce the tax hit is by moving money into ISAs (Individual Savings Accounts), which shelter all savings interest from tax. You can save up to £20,000 each tax year in an ISA.
Mr Wright said: “ISAs remain an accessible and flexible option, empowering savers to protect more of their hard-earned money and make the most out of their nest eggs as they plan for, or live through, retirement.”
Some of the top fixed-rate and easy-access Cash ISAs on the market are offering up to 4.4% AER interest rates.
