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Do you need to do a tax return for your savings?
The balance needed to fall into the savings tax trap is now three times smaller than in 2021-22
Until a few years ago, only savers with the biggest nest eggs had to worry about paying tax on their savings interest. But higher interest rates have pushed returns up sharply, meaning people with far more modest balances are now being caught up in HMRC’s net.
Our analysis of Moneyfacts data found that basic-rate taxpayers opening today’s top one-year fixed account could be liable to pay tax on savings interest with a balance of around £22,000. That’s roughly three times less than four years ago, when you could save up to £74,000 before worrying about a tax bill.
If you pay tax through self-assessment, it’s your responsibility to report savings and investment income. With the 31 January deadline fast approaching, Which? explains what savers need to know about tax on interest.
What tax do you pay on savings?
A portion of your returns is shielded from tax thanks to the personal savings allowance (PSA).
The PSA currently stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers don't have a PSA, meaning all their savings interest is subject to income tax.
Any interest that exceeds your PSA will be charged at your usual rate of income tax (20%, 40% or 45%). From 2027, however, the rate of income tax on savings interest will rise by two percentage points.
- Find out more: best savings rates 2026
Will you be taxed on savings?
The balance required to exceed the PSA has shrunk dramatically over the past few years, thanks to rising savings rates.
For example, Moneyfacts data shows the best one-year fixed-term deal on 21 January 2022 paid a rate of 1.36% AER. A basic-rate taxpayer opening this account would need to save a little over £74,000 before potentially breaching their PSA – or around £37,000 for those paying the higher-rate of income tax.
But a basic-rate taxpayer opening today's top one-year fix earning 4.55% AER would exceed their PSA with a balance of almost £22,000. That drops to just over £10,000 for a higher-rate taxpayer.
At the same time, the government’s freeze on income tax thresholds until 2031 means more people are being pulled into higher tax bands and see their PSA halved as a result.
- Find out more: tax on savings interest and investment income explained
Will you face a savings tax bill?
The total number of people paying tax on their savings income is set to quadruple in just four years, according to HMRC data obtained by AJ Bell.
This table breaks down the number of basic-rate, higher-rate, and additional-rate taxpayers paying income tax on savings interest:
| Financial year | Basic-rate taxpayer | Higher-rate taxpayer | Additional-rate taxpayer |
|---|---|---|---|
| 2021-22 | 226,000 | 158,000 | 249,000 |
| 2022-23 | 494,000 | 405,000 | 301,000 |
| 2023-24 | 1,000,000 | 720,000 | 458,000 |
| 2024-25 | 1,130,000 | 839,000 | 513,000 |
| 2025-26 | 1,150,000 | 897,000 | 548,000 |
Source: HMRC/AJ Bell. Data obtained using a Freedom of Information request. The 2021-22 figures are based on HMRC's Survey of Personal Incomes (SPI). The 2023-24, 2024-25 and 2025-26 figures are estimates.
As the figures show, more than two and a half million taxpayers will face a bill from HMRC on their savings in 2025-26 – up from just 633,000 in 2021-22.
The number of basic-rate taxpayers having to pay tax on their savings will rise from 226,000 in 2021-22 to an estimated 1.15 million people in this financial year – that's five times more than four years ago. While the number of higher-rate taxpayers affected is predicted to surge to 897,000 this year, up from 158,000 in 2021-22.
- Find out more: how to fill out a self-assessment
How do you pay the bill?
If you're employed, HMRC will automatically collect the tax you owe through pay-as-you-earn (PAYE), usually by tweaking your tax code.
But if you're paying your tax using self-assessment, then it's your job to report your savings income as part of your tax return, even if it is less than the PSA.
Banks and building societies send savings interest data to HMRC after the end of the tax year. The tax office will then use that information to estimate how much tax you owe, and then check the figure you declare on your return matches.
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Get startedWhat if you've paid too much?
If you find you've paid too much tax on your savings interest, you might be able to claim it back from HMRC – either via self-assessment or, if you're employed, by filling in an R40 form.
Remember, if you think you made a mistake after submitting your tax return, you can correct it within 12 months of the self-assessment deadline – either online or by sending another paper return. If you need to make a change to a return from an earlier tax year, you’ll need to write to HMRC.
To reclaim tax from earlier years, you’ll need to write to HMRC. It’s possible to claim back overpaid tax on savings from up to four tax years ago, and refunds usually take around six weeks to process.
Ways to reduce your savings tax bill
There are several ways to reduce paying tax on your savings interest.
Open an Isa
Putting money in an Isa means you can save up to £20,000 a year tax-free. Savers can deposit the full allowance into a cash Isa, stocks and shares Isa or innovative finance Isa, or any mix of the three types.
Bear in mind, however, that from April 2027 the amount you can hold in cash will fall to £12,000 for savers under 65. To use the full £20,000 Isa allowance, the remaining £8,000 would need to be invested in a stocks and shares Isa.
- Find out more: best cash Isas 2026
Premium bonds
You can hold up to £50,000 tax-free in premium bonds. While they don't pay any interest on the money you save, every month you'll be entered into a prize draw with a chance of winning anything from £25 to £1m.
However, it's worth bearing in mind that for every millionaire jackpot winner there will be many, many people not winning anything at all. It really is the luck of the draw.
- Find out more: premium bonds – are they worth it?
Starting rate for savings
Lower-income savers may benefit from this tax break, which currently allows you to earn up to £5,000 in savings income, tax-free. However, to be eligible you'll need to be earning less than £17,570 from other income sources. If that's you, here's how it works.
Every £1 of other income (for example, your wages or pension) above your personal allowance of £12,570 reduces your starting rate for savings by £1. So, let's say you earn £15,000 a year. You'd have £2,430 of taxable income and your starting rate for savings will be reduced by the same amount.
After deducting that from the £5,000 cap, it means you can earn up to £2,570 in interest without paying a penny in tax.
