A tax "bombshell" is set to hit 2 million pensioners, according to new figures. A Freedom of Information request submitted by Paragon to HMRC showed that 2.1 million people aged 65 and over are expected to face an Income Tax liability on their savings income in 2026/27, more than four times the 517,000 recorded in 2022/23.
In the UK, you do not pay tax on the money you deposit into a savings account, but you may pay Income Tax on the interest your savings earn. How much you pay depends on your total taxable income, your tax band, and specific tax-free allowances.
Tax liability forecast to reach £3.34 billion
The total tax liability on savings income among people aged 65 and over is forecast to reach £3.34 billion in 2026/27, compared with £795 million four years earlier. Those aged 65 and over are expected to account for almost half (47%) of all taxpayers with an Income Tax liability on savings income in 2026/27, up from 42% in 2022/23.
The issue is arising because rates have been frozen for years, meaning more and more people are, simply through inflationary rises, falling victim to increased tax.
Allowances and thresholds explained
There are a number of different thresholds for tax. The Personal Allowance allows you to earn up to £12,570 a year from all income sources (work, pension, and savings interest) tax-free. The Personal Savings Allowance (PSA) gives basic-rate (20%) taxpayers up to £1,000 of savings interest tax-free, higher-rate (40%) taxpayers up to £500, and additional-rate (45%) taxpayers no PSA.
The Starting Rate for Savings provides up to £5,000 of extra tax-free allowance for savings interest if your other income is below £17,570. This reduces by £1 for every £1 of other income above the £12,570 Personal Allowance.
ISA allowance change for over 65s
From the 2027/28 tax year, savers aged 65 or above will retain their full £20,000 cash ISA allowance, while savers aged 64 and under will only be able to save £12,000 in cash into an ISA.
Andrew Wright, Head of Savings at Paragon Bank, said: "Millions of older savers are being pulled into the tax net, putting more of their retirement savings at risk, with four times as many savers aged 65 plus incurring a tax bill on their interest than just four years ago.
"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+ have the benefit of retaining the full £20,000 cash ISA allowance from next tax year."
Growing number of savers affected
It comes as savers have been cautioned that they may be caught out by 'surprising tax traps' many are unaware of - including simply giving money to their children. The personal savings allowance has remained unchanged since its introduction a decade ago. Last year, savers handed over more than £6 billion in tax on savings interest, a stark increase from £1.6 billion in 2016.
Approximately 2.8 million individuals paid tax on their savings during the 2025-2026 tax year, according to HM Revenue & Customs, a significant jump from 1.3 million in the preceding tax year.
Personal finance expert Martin Lewis has previously highlighted that individuals with relatively modest savings can find themselves liable for tax. He explained that a basic rate taxpayer can earn £1,000 annually of interest across any form of savings without incurring tax.
"Presently, the leading savings accounts offer around 4.5 per cent interest. Therefore, you would need approximately £22,000, just slightly over £22,000 in the best savings account before you accumulated £1,000 in interest," he said. He also noted that higher-rate taxpayers can earn £500 a year of interest tax-free, and additional-rate taxpayers earning over £125,000 do not get a PSA.
Those on lower incomes may be able to earn up to £5,000 through the starting rate for savings, provided their income sits below the £12,570 personal allowance threshold. However, the allowance decreases by £1 for every extra £1 of income above the threshold, disappearing once earnings reach £17,570.
Mr Lewis added: "The next one not that many people know about is called the starting rate for savings. This is another £5,000 of savings interest you can earn a year on top of the personal allowance. And this is designed for people who have low work earnings but high interest on savings. Often people who are retired.
"For every pound of earnings you earn above this allowance, you lose a pound on your starting savings rate. So imagine you earn £13,570. You're a £1,000 above that. You can now only have £4,000 of tax-free interest in your savings due to the starting savings rate. And by the time you earn from work £17,570, this is gone."
HMRC said: "While most people don't pay any tax on their savings interest, we encourage savers looking to withdraw savings early to be aware of the rules around interest and early withdrawal charges."
