Nearly five million more savings accounts are now liable for tax than in 2018, according to an analysis by Yorkshire Building Society using CACI data. The rise is attributed to frozen tax thresholds, which have not increased since the personal savings allowance (PSA) was introduced in 2016.
Sharp increase in taxable accounts
The analysis found that 5.3 million non-ISA savings accounts were forecast to generate more than £1,000 in annual interest in January 2026, up from just 462,000 in January 2018. This marks an increase of 1,047%.
While interest rates on savings accounts have increased significantly over the past couple of years, with some accounts offering upwards of 5%, the frozen tax-free personal allowance has remained the same. The allowance allows basic-rate taxpayers to earn up to £1,000 in savings interest tax-free, and higher-rate taxpayers earn £500. However, it has seen no increase since its introduction, with higher interest rates pushing more people into the tax bracket.
Impact on savers
A savings rate of around 4% would mean a basic-rate taxpayer could surpass the £1,000 with just £25,000 saved. Yorkshire Building Society has warned savers to be aware of this allowance and what tax bill they might incur if they earn a certain amount from money stashed away.
The society found that 36% of people have never heard of the PSA, while only 31% know how tax is paid if they exceed it.
How tax is collected
Most of the time, HMRC collects the tax automatically by adjusting a person's tax code, based on information given by banks and building societies. However, those who complete a self-assessment return, such as people who are self-employed, have to declare their savings interest themselves. Savers who are neither employed nor completing a self-assessment will normally be contacted by HMRC about how to pay.
Thanks to frozen thresholds, 2.1 million people aged 65 and over are expected to face an Income Tax liability on their savings income, more than four times the 517,000 recorded in 2022/23. That is according to figures acquired from HMRC.
A Freedom of Information request submitted by Paragon to HMRC found 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.
