HMRC data projects that the number of people aged 65 and over expected to pay tax on savings interest will rise from 517,000 in 2022-23 to 2.1 million in 2026-27, according to a warning from Paragon Bank. This surge means over-65s could account for nearly half of all UK adults liable for tax on such earnings, with the government expected to collect more than £3.34bn in 2026-27 as a result.
Frozen thresholds and rising rates drive the increase
The Labour government has decided to keep the personal savings allowance frozen, which allows basic-rate taxpayers to earn £1,000 in savings interest each year without paying tax, on top of the £12,570 income tax personal allowance. Higher-rate taxpayers have a £500 allowance, while additional-rate taxpayers have none.
For example, a pensioner with £30,000 in a savings account earning at least 4.5% interest would receive £1,350 in annual interest, breaching the £1,000 allowance by £350. This scenario illustrates how modest savings can now trigger a tax bill.
Expert commentary on the impact
Andrew Wright, head of savings at Paragon Bank, said: "The personal savings allowance has remained unchanged, so more people are being pulled into the tax net as their incomes and savings interest rise." He added: "Higher interest rates have been positive for savers, helping them earn more on their money, but they have also increased the likelihood of breaching the allowance."
Wright also emphasised the importance of planning: "With savings often providing vital financial security later in life, it is important to regularly review where your money is held. Making full use of your ISA allowance can help protect more of your hard-earned interest from tax, and those aged 65 or over have the benefit of retaining the full £20,000 cash ISA allowance from next tax year."
Advice for pensioners to mitigate tax
To avoid breaching the allowance, pensioners can consider moving savings into ISAs, which offer tax-free interest. The full £20,000 cash ISA allowance remains available to those aged 65 and over from the next tax year, providing a significant opportunity to shield interest from taxation.
As the projected figures indicate, the trend is set to affect millions, making proactive financial reviews increasingly important for older savers.
