Figures released by HM Revenue & Customs reveal that 144,000 people are expected to pay tax on their savings interest amounting to more than £5,000 in the current tax year. The results of a Freedom of Information request from Paragon Bank show a 173% rise in the numbers paying at least that amount since 2022-23.
The bank said the data highlights how tax is becoming a growing issue for savers with bigger balances, especially when many hold substantial sums in cash as they take advantage of competitive rates. It pointed to CACI data showing there are 1.1 million instant access adult non-ISA accounts holding £100,000 or more, with a combined value of £260.7 billion.
What Can Savers Do to Protect Their Money?
Savers are shielded up to a point due to the personal savings allowance. This is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and zero for additional rate taxpayers. But experts suggest further steps to protect hard-earned cash.
Antonia Medlicott, founder and MD at Investing Insiders, told the Daily Express: "The easiest way to reduce the risk is to make sure you use your ISA allowance." She advised moving cash earning taxable interest into an ISA first, up to the £20,000 annual allowance for 2026-27, and prioritising highest-interest balances as allowance permits.
Options for Savers Who Have Used Their ISA Allowance
For those who have already maxed out their ISA allowance, Medlicott suggested making pension contributions or Gift Aid donations. This can extend your basic rate band and potentially drop you from a higher rate back to basic rate status, doubling your personal savings allowance from £500 to £1,000.
She also recommended: "If you have a partner who earns less than you or is a non-taxpayer, look to move savings into their name as they have significantly more tax-free headroom." Additionally, savers should check whether the starting rate for savings applies. If non-savings income is below £17,570, you can get up to £5,000 of savings interest taxed at 0% on top of the personal savings allowance.
Premium Bonds and Other Strategies
Another option for those who have maxed out their ISA allowance is Premium Bonds, a Government-backed savings product issued by National Savings & Investments. Medlicott said: "You aren’t guaranteed any returns, but you could also receive more than you would get in interest. Any returns you do get are tax-free and do not count toward the personal savings allowance, with up to £50,000 allowed per person. However, the caveat here is that this is a total limit, and not a yearly limit like the ISA allowance."
Those reinvesting a maturing fixed-rate bond should choose a product which pays interest annually rather than at maturity. Medlicott explained: "This will avoid several years of interest landing in one tax year and pushing you over your allowance in a single hit. It’s also vital to be aware that if your total savings interest exceeds £10,000, then a self-assessment return is required and failing to file this or doing it late will see penalties applied."
Upcoming Changes to Savings Income Tax Rates
Medlicott noted that the need to act may be even greater now, as from April 2027, a new separate savings income tax rate will apply. Under plans announced at the Budget last year, the rate will be 22% for basic rate taxpayers, 42% for higher rate taxpayers, and 47% for additional rate taxpayers.
Should You Hold Large Amounts of Cash?
Rebecca Williams, Financial Planning Divisional Lead at Rathbones, suggested savers may want to consider moving some of their holdings out of cash. She explained that while cash can feel safe and provide a buffer if circumstances change, it is not risk-free. "Inflation quietly erodes its value over time so while it looks like you aren’t losing money what you can buy with that money is getting less and less. Add in paying more tax on savings interest and many savers don’t realise they’re going backwards in real terms."
She added that this does not mean everybody should rush into investing, as enough cash would still be needed for emergencies and other spending plans. "As a rule of thumb, we recommend people hold around three to six months’ worth of spending in cash for emergencies, plus money set aside for spending they know is coming up like a tax bill. But once that buffer is in place, it is worth questioning whether holding large amounts of cash is providing security or leading to a poorer retirement. The bigger issue is not just tax on savings interest — it is whether people are giving their money the best chance of supporting their long-term financial security."
How to Check if You Owe Tax
To check if you might have to pay income tax on your savings interest, you should add up all savings interest earned outside of ISAs across all your accounts this tax year. This total should then be compared to your personal savings allowance. For anyone employed or who receives a pension, HMRC may already be collecting tax owed by adjusting your tax code. This shows up as reduced take-home pay, so Medlicott recommended checking your code if it has changed unexpectedly.
