Experts raised the alarm over the frozen Personal Savings Allowance (PSA) thresholds, warning that m (Image: Getty)
Data from CACI Business Consultancy, analysed by Shawbrook, suggests that six million savings accounts (6,085,327) could unwittingly breach the Personal Savings Allowance (PSA) threshold and be landed with an unexpected tax bill.
The experts attributed this to savers seeking to maximise the interest earned on their cash, while capitalising on a sustained period of relatively high interest rates during a time when the PSA has remained frozen.
There are two key savings thresholds — basic rate taxpayers can earn £1,000 in savings interest without paying tax, while higher rate taxpayers (earning over £50,000) can receive £500 before the taxman comes calling. Both thresholds have remained frozen since 2021.
For the 2025/26 tax year, an estimated 2.7 million savers will face a tax charge on their interest for the first time as a direct consequence of frozen thresholds and higher interest rates. Accountants David and Co said: “You’ve likely noticed that while your returns have improved, the static £1,000 Personal Savings Allowance hasn’t kept pace with the current economic reality. This shift has prompted a significant hmrc tax warning for those who aren’t aware that their banking data is now more visible to the authorities than it has been since the data-sharing rules were updated in 2016.”
“The economic climate has shifted significantly over the last few years. The Bank of England base rate reached 5.25% in August 2023 and remained elevated well into the mid-2020s. This means a cash balance of £20,000, which might have earned negligible interest in 2021, is now generating returns well above the £1,000 threshold for many. “
Sally Conway, savings expert at Shawbrook, previously said: “Without careful consideration savers could face a shock tax bill on their nest eggs. There are currently over five million more savings accounts at risk of tax than there were just over three years ago. This outlines just how much the frozen threshold has impacted savers who aren’t making use of ISAs.
“With savers still taking advantage of competitive interest rates, many savers could be sleepwalking into a tax bill on their interest. This is particularly relevant for higher-rate taxpayers, who only get £500 tax-free, and additional-rate taxpayers, who get none. For example, a higher-rate taxpayer with £12,000 in a non-ISA account earning 4.30% could exceed their tax-free allowance.
“To avoid this and make the most of higher rates while they last, savers should consider ISAs, which allow up to £20,000 tax-free savings per person. Making use of ISAs can be a great way to boost savings in a tax-efficient manner. Additionally, exploring options beyond major banks might lead to better interest rates, often specialist savings banks can be savers’ best-kept secret.”, reports the Express.
Introduced in 2016, the Personal Savings Allowance (PSA) thresholds were intended to permit savers to earn a modest amount of interest without being taxed. Nevertheless, as interest rates have climbed, a growing number of savers are now breaching their respective thresholds. Back in October 2021, just 147,000 savings accounts were at risk of taxation, yet the sharp rise highlights the consequences of frozen thresholds, potentially dragging some 5.8m additional accounts into paying tax. A personal finance expert has previously addressed the thresholds and cautioned people about the risk of inadvertently paying tax on their savings interest. On his BBC podcast, the Money Saving Expert founder outlined two thresholds — £10,000 and £20,000 — that people need to be mindful of, depending on their level of earnings.
He also highlighted ways of reducing any potential tax liability by making use of the right types of accounts. Mr Lewis noted that one crucial figure was £12,570, as this represents the personal tax threshold for everybody: “The first thing to say is everybody has £12,570 that they can earn from any source, whether earned income or savings interest, or anything else which you don’t pay tax on – your normal standard tax-free personal allowance.
“In savings specifically you then have, if you’re a basic 20 per cent rate taxpayer, £1,000 a year of interest you can earn from any savings source which you don’t pay tax on. That’s £1,000 of interest, not £1,000 in a savings account.”
This means that with a competitive savings account, people should keep a close eye on how much they have stashed away, with standard rate taxpayers being comfortable holding £20,000 in savings: “So at 5 per cent interest as a basic rate taxpayer you can put £20,000 in a savings account and it would be tax free because that would generate £1,000 of interest. “As a higher 40 per cent rate taxpayer, you’re allowed £500 of interest tax-free. “So it would be £10,000 in there that would save you and you wouldn’t pay interest if you have in the top 5% savings account. If you happen to be lucky enough to be a top 45 per cent rate taxpayer earning over £125,000 you don’t get one of these,” Mr Lewis explained.
For those on lower incomes – or individuals living entirely off savings interest – there exists a further tax allowance. Mr Lewis explained: “There is another savings allowance that is rarely spoken about. This is called the starting savings allowance. Now this is for low earners and it’s quite complicated.
“So what it says is you can earn up to £5,000 on top of your £1,000 as a basic rate taxpayer of interest tax free as a low earner. If you have earned income under £12,570 which is the standard tax allowance you can earn £5,000 on top of that in savings in this starting savings allowance in savings interest which is untaxed. For every pound you earn above £12.570 you lose a pound of the £5,000. “
Mr Lewis illustrated the point with an example, explaining that if you earned £13,570 you would only receive £4,000 of your starting savings allowance. He went on to say: “For people where all of their money was generated by savings interest they would have £12,570, their normal tax free allowance, they would have their £5,000 starting savings allowance and they would have their £1,000 savings allowance ads a basic rate taxpayer which means you can earn £18,570 tax free if all your money came from savings interest. And then you could have an ISA on top for £20,000 a year which would be tax free and you could put money into Premium Bonds, £50,000 of which would be tax free.”
