A combination of frozen income tax thresholds, the fixed Personal Savings Allowance (PSA), and higher interest rates is pushing more ordinary savers into paying tax on their savings interest. According to new figures, more than 2.7 million people are set to pay tax on savings interest in the 2026/27 tax year, with around 144,000 facing bills of £5,000 or more.
How the Personal Savings Allowance works
The PSA allows basic-rate 20% taxpayers to earn £1,000 of interest each year before paying tax. This falls to £500 for 40% higher-rate taxpayers, while additional-rate 45% taxpayers receive no allowance. Many people do not need hundreds of thousands in the bank to exceed these limits. For example, a basic-rate taxpayer earning 4% interest will exceed their PSA with £25,000 in taxable, non-ISA savings accounts. A higher-rate taxpayer would hit their £500 limit with just £12,500. If they earn 5%, those balances fall to £20,000 and £10,000 respectively.
Common mistakes and hidden tax bills
Thomas Drury, money-saving expert at The Investors Centre, said many savers do not realise the PSA applies to the combined interest earned across all accounts, not separately to each bank. "You might earn £300 with one bank, £250 from another and £200 from a fixed account. None looks worrying alone, but together that is £750," he said. For a higher-rate taxpayer with a £500 PSA, that extra £250 would be taxed at 40%, creating a £100 tax bill. Interest from bank and building society accounts, credit unions, certain bonds and peer-to-peer lending all count, while interest inside an ISA remains tax-free.
HMRC may automatically adjust your tax code based on information reported by banks and building societies. Moving money between accounts does not hide interest. "Providers report the figures to HMRC, which can combine the amounts and compare them with your allowance," Drury said. HMRC may also estimate future interest based on previous earnings, so it is important to check any tax-code notice. "If you had a large fixed account mature last year, HMRC could initially assume you will receive similar interest again. Equally, if your savings have increased, the estimate may be too low."
How to protect your savings from tax
The simplest way to avoid a surprise bill is to add up the interest you expect from every taxable account for the whole tax year. Watch out for fixed-rate accounts where interest is often paid in one lump sum when the term ends. If you face a tax charge, consider shifting savings into a Cash ISA, where the interest remains tax-free. Always check access requirements, interest rates and product terms before moving money solely to save tax, Drury added. People who complete a self-assessment tax return may also need to report their savings interest depending on their circumstances and the amount received.
