People with more than £12,500 savings given urgent HMRC alert

Anyone earning over £50,000 has been given a warning about just £12,500 in savings – because a freeze on limits means they will be hit with tax. New analysis of data by Yorkshire Building Society showed a massive rise in people paying tax on savings interest.

The number of non-ISA savings accounts forecast to earn over £1,000 in interest has increased by 1047% since 2018 according to figures. Inflation, a higher interest rate environment and frozen tax-thresholds have contributed to millions more being liable to pay tax on their savings interest.

The analysis shows that in January 2018, around 462,000 accounts would have earned more than £1,000 in interest and be potentially liable for tax. Despite a temporary dip during the ultra low rate years of the pandemic, the number exploded as rates rose — reaching 2.5 million in January 2023, before surging to today’s figure of 5.3 million, which remains more than eleven times higher than in 2018.

The Personal Savings Allowance (PSA) is the amount of interest you can earn from savings each year without paying tax on it. How much you get depends on your income tax band: basic rate taxpayers can earn up to £1,000 in interest tax-free, higher rate taxpayers can earn up to £500, while additional rate taxpayers do not receive any allowance. Any interest earned above these limits is taxed at your usual income tax rate.

When the PSA was introduced on 6 April 2016, the majority of easy access accounts paid 1% or less, now the majority pay 3% or more. This means that in 2016 basic-rate-tax payers would have been able to put away a whopping £100,000 in a typical savings account. In 2026, savers would only be able to save around £25,000 at rates of 4% without breaching their allowance. For those earning over £50,271 and paying higher-rate tax, that amount would fall to around £12,500.

Tina Hughes, Director of Savings at Yorkshire Building Society, said: “The scale of this shift is staggering. Our analysis shows that the number of savings accounts potentially exposed to tax has gone from under half a million to well over five million in just a few years. This isn’t about people suddenly becoming wealthy — it’s about a frozen allowance colliding with much higher interest rates.”

“People doing the responsible thing — saving for a home, for emergencies or for the future — are now being punished by outdated rules. The Personal Savings Allowance urgently needs reform so it keeps pace with reality and supports savers, rather than catching them out.”

According to the Financial Conduct Authority (FCA) people hold between 3 and 5 savings products across 2-3 providers, meaning the number of people who could be liable to pay tax could be doing so without awareness.

The data also highlights how quickly savers have been pulled into tax as rates have fluctuated. In January 2022 just 172,000 accounts were potentially liable for tax on their interest. Within 12 months, that figure had multiplied more than fourteen fold, underlining how ill equipped the PSA is for changeable, or higher rate interest environment.

Despite the scale of the issue, awareness of PSA remains low. Yorkshire Building Society research shows that 36% of people have never heard of the Personal Savings Allowance, and only 31% know how to pay the tax if they exceed it — increasing the risk of accidental non payment and unexpected bills.

With the typical median house deposit now £36,500, millions of people saving for a first home or building a financial safety net are being pulled into being liable to pay tax simply for holding prudent levels of savings — often long before they see themselves as wealthy.

Yorkshire Building Society has urged savers to review their savings, understand how much interest they are earning across all accounts, and make full use of tax efficient options such as ISAs — particularly for those holding £20,000 or more in competitive savings products.

Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, said: “Savers are earning higher rates of interest, but they are also becoming ever more exposed to tax due to fiscal drag. The fact that there are millions of accounts becoming liable to tax over the past five years alone just shows how the Personal Savings Allowance has not moved on with the times and is in dire need of review to protect savers.

“Those who have been working hard to save for a home might not realise they could be breaching their PSA due to higher interest rates. To help savers shield their hard-earned cash from tax, it’s wise to take advantage of ISAs.

“As around a third of consumers do not really understand what the PSA is, it’s worth seeking independent advice to assess any savings interest that may be liable to tax before it becomes an unwelcome surprise.”