Millions of UK savers confront an average £641 tax bill on savings interest, prompting calls to maximize Cash ISAs for protection. Freedom of Information requests reveal that taxpayers liable for savings interest tax have surged more than twofold in three years, climbing from 1.27 million in 2022-23 to 2.79 million in 2025-26.
Basic Rate Taxpayers Hit Hardest
Basic rate taxpayers face the steepest rise, with those paying tax on savings interest jumping 132% from 613,000 in 2022-23 to 1.42 million in 2025-26. Savers in this band average £641 in income tax on their interest earnings.
Andrew Wright, head of savings at Paragon Bank, states: “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.”
Personal Savings Allowance Remains Frozen
The Personal Savings Allowance (PSA) shields most interest from tax but stays unchanged since its introduction nearly a decade ago. Basic rate taxpayers enjoy £1,000 tax-free interest, higher rate taxpayers get £500, while additional rate taxpayers pay on all interest outside tax-free accounts.
Competitive savings rates combined with the static PSA push more savers over the threshold, taxing interest at 20%, 40%, or 45% based on income bands. Wright attributes the 132% increase among basic rate taxpayers to retirees and those with modest incomes holding substantial savings.
Separate data shows individuals aged 65 and over will pay £2.5 billion in savings interest tax in 2025-26, up 215% from 2022-23. Wright adds: “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. 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. 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.”
ISAs: Key Tax-Free Savings Vehicles
Individual Savings Accounts (ISAs) offer tax-efficient options for UK residents. Higher balances amid elevated interest rates make ISAs essential for shielding returns.
Wright emphasizes: “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.”
Main ISA types include:
- Cash ISAs: Function like standard savings accounts with fully tax-free interest.
- Stocks and Shares ISAs: Invest in shares, funds, or bonds with tax-free growth and income.
- Innovative Finance ISAs: Higher risk, for peer-to-peer lending or crowdfunding with tax protection.
- Lifetime ISAs: Aid first home or retirement savings, with up to £1,000 annual government bonus.
The annual ISA allowance totals £20,000 from April 6 to April 5, splittable across types. Contributors must be 18+ (16+ for Cash ISAs) and UK tax residents. Under-18s qualify for Junior ISAs up to £9,000 yearly tax-free.
Upcoming ISA Rule Changes from 2027
From April 2027, Cash ISA limits drop to £12,000 for under-65s, transfers from Stocks and Shares ISAs to Cash ISAs end for this group, new investment eligibility applies to Stocks and Shares ISAs, and charges hit cash interest within them. Chancellor Rachel Reeves introduced these in the 2025 Autumn Budget to boost saver returns and encourage investment.
Joshua Croft, senior technical consultant at AJ Bell, notes for under-65s: “The lower Cash ISA limit means less tax-free shelter for low-risk savings. To maintain the full £20,000 allowance, they will need to consider Stocks and Shares ISAs, investing those funds into markets.”
Stocks and Shares ISAs Outperform Cash
New data shows average Stocks and Shares ISA funds grew 11.22% over 12 months to February, beating Cash ISAs’ 3.48% return for the third straight year.
Rachel Springall, finance expert at Moneyfactscompare, comments: “Stocks and Shares ISAs have now outperformed Cash ISA returns for the third consecutive year. This should be a wake-up call for those who fear investing, as cash returns have diminished. However, it is important not to rely on returns over the shorter term when making longer-term investment decisions. Cash is considered a safe choice, but investing shows the gains that could be made over the long term. Granted, past performance is not guaranteed to be repeated, so short-term gains should not be the decision-maker in isolation. The past year alone laid bare the importance of seeking advice before taking the plunge to invest – some sectors boom one year and perform badly the next, but can bounce back.”
Springall adds that Cash ISAs grow more appealing for those shifting to higher tax bands: “ISAs will be an essential part of any saver’s portfolio to shield returns from tax, but many will need to revisit their Cash ISA plans in the years ahead due to upcoming limit changes. The intention of the cut is to drive consumers to invest more, but anyone concerned should seek advice in the first instance to see how this will impact them.”
