HMRC is imposing tax charges on more than two million UK households, with the average bill reaching £2,300, according to new data. Experts warn that 2.6 million people are now paying tax on their savings, a sharp increase from previous years.
Soaring Numbers of Savers Hit by Tax
A Freedom of Information request reveals that 2.64 million individuals are expected to be taxed on their savings in the 2025/26 tax year, compared to just 647,000 in 2021/22. The figures, disclosed to investment platform AJ Bell, show the average saver pays £2,300 in tax, with an effective tax rate of around 31%.
Laura Suter, head of personal finance at AJ Bell, explained: “Although tax is charged at the individual’s marginal rate of either 20%, 40% or 45%, the average rate of tax indicates the typical percentage sent to the taxman once tax-free allowances have been factored in.”
Why Are More People Being Taxed?
The rise in savings tax is driven by higher interest rates and frozen tax bands, which have created a windfall for the Treasury. Britons are expected to earn around £20 billion in interest from non-ISA cash accounts this year, a more than fourfold increase over five years. Suter added: “That boon for savers has turned into a bounty for the taxman. It expects to collect more than £6 billion when it takes its slice of the income earned by savers in the current tax year.”
How to Protect Your Savings from Tax
Most people can earn up to £12,570 tax-free thanks to the Personal Allowance. This is the total income from work, pensions, and interest before Income Tax is due. If your total earnings, including interest, are below this threshold, all your interest is tax-free.
The Starting Rate for Savings allows some individuals to earn up to £18,570 of salary and interest combined without paying tax on savings. This means you can earn up to £5,000 in savings interest on top of your Personal Allowance (from £12,570 to £17,570 for most) tax-free. However, for every £1 of extra income above your Personal Allowance, you lose £1 of the Starting Rate.
Additionally, the Personal Savings Allowance (PSA) provides further relief:
- Basic 20% rate taxpayers can earn £1,000 interest per tax year tax-free.
- Higher 40% rate taxpayers can earn £500 interest per tax year.
- Top 45% rate taxpayers do not receive a PSA.
By understanding these allowances, savers can minimise their tax bills and keep more of their hard-earned interest.
