Millions of households with savings accounts have been warned that rising interest earnings could trigger unexpected tax bills. The warning comes as new figures show HMRC is set to collect £8.2 billion in tax on savings interest in 2026/27, more than four times the £2 billion raised just four years earlier.
How the personal savings allowance works
Basic-rate taxpayers can earn up to £1,000 in savings interest each tax year before tax is due, but any interest above that amount may be taxed. The allowance falls to £500 for higher-rate taxpayers, while additional-rate taxpayers receive no tax-free allowance at all on savings held outside an ISA.
These allowances apply to the amount of interest earned, rather than the total balance held in an account. At an interest rate of 4%, a basic-rate taxpayer would reach the £1,000 threshold with savings of around £25,000, while a higher-rate taxpayer could exceed their £500 allowance with £12,500.
Expert warns of tax bill impact
Charlene Young, senior pensions and savings expert at AJ Bell, said: “Tax bills on investment income will hit almost £20 billion this year thanks to increases in dividend tax rates for basic rate and higher rate investors at the start of the tax year.”
She added that frozen income tax thresholds mean more people are finding themselves taxed at higher rates, even when their overall spending power has not increased by the same amount. “Savings income will account for around 2.4% of the total income tax take in the UK in 2026/27, an increase on the year before.”
Young noted: “This is no surprise when you consider the personal savings allowance has been stuck at £1,000 for basic rate taxpayers since it was introduced over a decade ago.”
She also highlighted that additional rate taxpayers face a 45% tax charge on their savings outside of tax wrappers, as they receive no personal savings allowance.
Dividend tax changes add to burden
Young commented: “When the tax-free allowance for dividends was introduced in 2016, it sat at £5,000, shielding most smaller retail investors. But since the last tax year, it has sat at just £500, meaning these same investors now face a tax bill on investments they don’t hold within a Stocks and Shares ISA.”
