HMRC's 'Surprise' £641 Tax Bill Warning to UK Savers as ISA Deadline Looms
Workers across the United Kingdom are being urged to take immediate action in the coming weeks to avoid paying unnecessary tax on their savings. New data from HMRC, obtained through a Freedom of Information request by Paragon Bank, reveals a dramatic surge in the number of taxpayers facing bills on their savings interest.
Sharp Increase in Taxpayers Facing Savings Interest Bills
The figures indicate that the number of people being taxed on their savings has more than doubled in just three years. From 1.27 million taxpayers in the 2022/23 tax year, the number has skyrocketed to 2.79 million in 2025/26. This represents a significant increase that has caught many savers unaware.
Basic rate taxpayers are particularly affected, with their numbers increasing from 613,000 in 2022/23 to 1.42 million in 2025/26. This represents a staggering 132% surge. Government data shows that, on average, savers in this tax bracket will pay £641 in Income Tax on their savings interest.
Why More Savers Are Being Taxed
With competitive savings rates persisting and the Personal Savings Allowance (PSA) remaining frozen, more savers are exceeding the tax-free threshold. This means their interest is being taxed at rates of 20%, 40%, or 45% depending on their income band.
The FOI findings demonstrate that as interest rates climbed following the 2022 mini-Budget, the number of higher-rate taxpayers paying savings tax rose from 387,000 in 2022/23 to 883,000 in 2025/26. The average payment for this tax year is expected to be £2,030 for higher-rate taxpayers.
Nearly half a million additional rate taxpayers are also predicted to pay tax on savings this tax year (479,000), compared to 271,000 in 2022/23. Their average bill is estimated at a substantial £6,990.
The Cash ISA Solution
Cash ISAs permit savers to earn interest entirely free of Income Tax, regardless of rate increases or changes to the PSA. With more customers amassing higher balances amid improved savings conditions, Paragon Bank states that the ISA wrapper remains one of the most effective methods for protecting returns from tax.
Currently, savers can deposit £20,000 per tax year into a cash ISA. Anyone with spare allowance can maximise their tax-free interest by utilising it before the end of the tax year on April 5, 2026.
Important note: From 2027, the rules are changing. While the overall ISA limit remains £20,000, only £12,000 per year will be permitted into a cash ISA. The £8,000 difference will need to be invested in a different type, such as a stocks and shares ISA.
'Surprise' Letters from HMRC
Andrew Wright, Paragon Bank head of savings, commented: "More people than ever are being drawn into paying tax on their savings and a letter from HMRC risks catching many by surprise. With the number of taxpayers on savings interest rising so sharply, it's never been more important for savers to consider using cash ISAs."
He added: "The tax-free status of ISAs means savers keep every pound of interest they earn, providing certainty and protection at a time when allowances are frozen and interest rates remain competitive."
Retirees Particularly Affected
The 132% rise in basic-rate taxpayers paying tax on savings interest is likely being driven by retirees and people with modest incomes but meaningful savings balances. Paragon's separate FoI request shows individuals aged 65 plus are forecast to pay £2.5 billion in tax on their savings interest in 2025/26, a 215% increase on 2022/23.
Wright explained: "Many pensioners depend on savings interest to support their income, but frozen Income Tax thresholds and unchanged Personal Savings Allowances are pulling more people into a part of the tax system originally designed for wealthier individuals."
He warned: "With tax on savings income due to increase from April 2027, that pressure will only intensify at a time when households are still contending with the effects of inflation."
Understanding Personal Savings Allowances
For those paying the higher rate of tax, the PSA stands at just £500, which means even relatively small balances can trigger a tax liability. Basic rate taxpayers benefit from a PSA of £1,000, while additional rate taxpayers receive no PSA allowance whatsoever.
Wright concluded: "More mature savers value the stability of cash and have saved prudently over many years to build financial resilience, so it's unfair they are being punished through a tax system not initially designed for them."
The message from financial experts is clear: savers should review their positions immediately and consider utilising their cash ISA allowances before the April 5 deadline to avoid unexpected tax bills from HMRC.
