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Half a million savers face a tax bill over £2,000 — how to pay less
Rising rates and frozen thresholds mean more people are having to pay tax on their savings
Matthew is an award-winning journalist, specialising in savings, tax and insurance.
The number of savers facing a tax bill of over £2,000 has quadrupled in four years, with more than half a million expected to owe HMRC in 2026-27.
More than 100,000 could be hit with bills exceeding £10,000, according to tax office figures obtained by Paragon Bank. That's up from just 28,000 in 2022-23.
So why are more savers being caught in the tax trap and what can you do to reduce your bill?
What tax do you pay on savings?
A portion of 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.
A basic-rate taxpayer will therefore be faced with a 22% charge, higher-rate taxpayers will pay 42%, and those in the additional-rate tax band will pay 47%.
- Find out more: best savings rates 2026
Surge in savings tax bills
The total number of people paying over £2,000 in tax on their savings income is expected to hit an estimated 542,000 in 2026-27, according to HMRC data obtained by Paragon Bank. That's four times more than the 119,000 recorded in 2022-23.
Savers owing the taxman more than £10,000 on interest income are also set to surge from 28,000 to 109,000 over the same time period.
This chart shows the estimated number of savers paying tax on interest from 2022-23 to 2026-27.
Source: HMRC/Paragon Bank
Why are more savers paying tax on interest?
In the past, only savers with a large lump sum had to worry about exceeding the PSA, but a rising number of people are facing a savings tax bill.
There are two main reasons for this:
Rising savings rates
Savings rates have hit record highs over the past few years. In October 2022, the best one-year fix offered an impressive 6.2% AER. Rates have dropped since that peak, but they are climbing again, and you can still find an equivalent account with a top rate of 5%. The result is that even savers with modest pots are facing tax bills.
This table shows how much a basic-rate and higher-rate taxpayer needs in savings, at various interest rates, before interest is taxed.
| AER | Savings balance for a basic-rate taxpayer | Savings balance for a higher-rate taxpayer |
|---|---|---|
| 1% | £100,000 | £50,000 |
| 2% | £50,000 | £25,000 |
| 3% | £33,333 | £16,666 |
| 4% | £25,000 | £12,500 |
| 5% | £20,000 | £10,000 |
Threshold freeze
Wage increases and income tax thresholds frozen until 2031 are dragging more people into a higher tax band. These savers have a smaller PSA to play with as a result.
HMRC data shows there is expected to be 7.7 million higher-rate taxpayers this financial year. That's an increase of more than 1 million in the past two years alone and 3 million more than in 2021-22 when thresholds were first frozen.
The number of additional-rate taxpayers has more than doubled within the same time period, jumping from 520,000 to an estimated 1.3 million in 2026-27.
Not only was this band frozen at £150,000, but it was then cut to £125,140 in 2023-24. It means more people have been dragged into the top tax rate and will need to pay income tax on all of their savings returns.
There are also 4 million more taxpayers paying the basic-rate tax for the first time.
- Find out more: Tax-free income and allowances
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 and investment income as part of your tax return.
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 that the figure you declare on your return matches.
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
- Find out more: How to fill in a self-assessment tax return
An Isa can shield up to £20,000 from tax
An Isa is a great way to protect your savings interest or investment income from tax.
You can put up to £20,000 in a cash and/or stocks and shares Isa, and any income generated can grow completely tax-free, protecting your savings now and in the future.
Although the cash Isa limit for savers under 65 will fall to £12,000 from April 2027, the overall Isa allowance will remain at £20,000. That means under-65s wanting to use their full Isa allowance will need to invest at least £8,000 in a stocks and shares Isa.
This table shows the top cash Isa accounts, ordered by term:
| Instant access | Sidekick | Cash Isa | 4.61% (a) | n/a | £1 | Mobile app | Monthly | Yes |
| One-year fixed rate | RECOMMENDED PROVIDER Charter Savings Bank | 1 Year Fixed Rate Cash Isa | 4.74% | 82% | £5,000 | Internet | Monthly, anniversary | Yes |
| Two-year fixed rate | Hodge Bank | 2 Year Fixed Rate Cash Isa | 4.81% | n/a | £1,000 | Internet | Monthly, anniversary | No |
| Three-year fixed rate | RECOMMENDED PROVIDER Charter Savings Bank | 3 Year Fixed Rate Cash Isa | 4.83% | 82% | £5,000 | Internet | Monthly, anniversary | Yes |
| Four-year fixed rate | UBL UK | 4 Year Fixed Rate Cash Isa | 3.91% | n/a | £2,000 | Branch, internet, mobile app, postal | Monthly, quarterly, anniversary, on maturity | Yes |
| Five-year fixed rate | Furness Building Society | 5 Year Fixed Rate Isa | 4.91% | n/a | £1,000 | Branch, internet, mobile app, postal | Anniversary | Yes |
Table notes: rates sourced from Moneyfacts on 9 September 2026. Provider customer score is based on savers' overall satisfaction with the brand and how likely they are to recommend it to others. n/a means sample size was too small for us to generate a provider score. (a) Includes a 1.38% bonus rate for the first 6 months.
Compare savings accounts
Find the right savings account for you using the service provided by Experian Ltd
Compare and choose- Find out more:Best cash Isas
How to maximise your Isa savings
Here are some savvy ways to make the most of the higher rates currently available on cash Isas:
- Max out your allowance: if you have the cash to do so, you should max out your £20,000 allowance before the end of the tax year. That's because you can't carry over any unused allowance when it renews on 6 April.
- Mix and match: savers can now open and pay into multiple Isas of the same type annually. Previously, you could only put money into one of each type of Isa every tax year. The change means you can move more easily between different providers and get the best deal.
- Keep it in the family: if you've used up your allowance, but your partner hasn't, you can pay into their account instead, effectively increasing your shared Isa allowance to £40,000. If you have a child, you could also open a Junior Isa (Jisa) with an annual allowance of £9,000. A family of four could therefore save £58,000 a year tax-free.
How else can you reduce tax on savings?
There are a couple of other ways savers can side-step or reduce tax on savings income:
Premium bonds
This government-backed savings product is popular with people who not only want to shelter their nest egg from tax but enjoy the thrill of a flutter.
You can hold up to £50,000 tax-free, but they don't pay interest. Instead, you're entered into a monthly prize draw, with prizes ranging from £25 to £1m. Bear in mind that the current odds of winning any prize are just 21,000 to one, meaning many people will get nothing at all.
Starting rate for savings
Lower-income savers may also be able to make use of the starting rate for savings. This allows you to earn up to £5,000 in savings income tax-free, provided you earn less than £17,570 from other sources. The allowance is reduced by £1 for every £1 of other income you earn above the £12,570 personal allowance.
So, if you earn £15,000 a year, £2,430 of your income is above the personal allowance, reducing your £5,000 starting rate for savings to £2,570. In other words, you could earn up to £2,570 in savings interest without paying tax.
