The number of savings accounts potentially exposed to tax has soared to 5.3 million, according to Yorkshire Building Society, which has issued a warning to basic-rate taxpayers earning between £12,570 and £50,270 with £25,000 in savings.
The building society attributes the rise to frozen savings allowances and higher interest rates, now averaging 4% across the country. In January 2018, around 462,000 accounts would have earned more than £1,000 in interest and been potentially liable for tax. By January 2023, that figure had risen to 2.5 million, and it now stands at 5.3 million.
Personal Savings Allowance rules
Under HMRC rules, basic rate taxpayers can earn up to £1,000 in interest tax-free, while higher rate taxpayers can earn up to £500. Yorkshire Building Society found that basic-rate savers would only be able to save around £25,000 at rates of 4% without breaching their allowance.
The warning comes as the Labour Party government faces scrutiny over the impact of fiscal drag on savers. The building society says the frozen allowance, combined with rising rates, is catching out those who are saving responsibly.
Industry reaction to the tax burden
Tina Hughes, Director of Savings at Yorkshire Building Society, said: “The scale of this shift is staggering. Our analysis shows that the number of savings accounts potentially exposed to tax has gone from under half a million to well over five million in just a few years. This isn’t about people suddenly becoming wealthy — it’s about a frozen allowance colliding with much higher interest rates.
“People doing the responsible thing — saving for a home, for emergencies or for the future — are now being punished by outdated rules. The Personal Savings Allowance urgently needs reform so it keeps pace with reality and supports savers, rather than catching them out.”
Advice for savers
Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, said: “Savers are earning higher rates of interest, but they are also becoming ever more exposed to tax due to fiscal drag. The fact that there are millions of accounts becoming liable to tax over the past five years alone just shows how the Personal Savings Allowance has not moved on with the times and is in dire need of review to protect savers.
“Those who have been working hard to save for a home might not realise they could be breaching their PSA due to higher interest rates. To help savers shield their hard-earned cash from tax, it’s wise to take advantage of ISAs.
“As around a third of consumers do not really understand what the PSA is, it’s worth seeking independent advice to assess any savings interest that may be liable to tax before it becomes an unwelcome surprise.”
The warning highlights the need for savers to review their interest earnings and consider tax-efficient options like ISAs to avoid unexpected tax bills.
