HMRC is dispatching tax demand letters to thousands of savers, with basic rate taxpayers facing an average bill of £641. According to figures obtained via a Freedom of Information request, the number of individuals paying tax on their savings has more than doubled in just three years, surging from 1.27 million in 2022/23 to 2.79 million in 2025/26.
Sharp Rise in Basic Rate Taxpayers Affected
Basic rate taxpayers are particularly impacted, with the figure rising from 613,000 in 2022/23 to 1.42 million in 2025/26—a 132% increase. Government data reveals that these savers will, on average, pay £641 in Income Tax on their savings interest.
With savings rates remaining competitive and the Personal Savings Allowance (PSA) frozen, more savers are exceeding the tax-free threshold. Consequently, interest is taxed at 20%, 40%, or 45%, depending on the individual's income band.
What Counts Toward Your Allowance
Several income sources count toward the Personal Savings Allowance. HMRC states: "If you go over your allowance, you pay tax on any interest over your allowance at your usual rate of income tax. If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically."
To determine your tax code, HMRC estimates your current year's interest based on the previous year's amount. Affected accounts include:
- Bank and building society accounts
- Savings and credit union accounts
- Unit trusts, investment trusts, and open-ended investment companies
- Peer-to-peer lending
- Trust funds
- Payment protection insurance (PPI)
- Government or company bonds
- Life annuity payments
- Some life insurance contracts
Expert Advice: Consider Cash ISAs
Andrew Wright, Paragon Bank Head of Savings, commented: "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. 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."
