- Cash savers face 2% tax rise
- Rising rates, frozen tax thresholds and fixed personal savings allowance have already combined to drag millions into tax on savings
- Savers also face hit from reduced Cash ISA allowance
- Savings interest of £5,000 above the personal savings allowance will incur an extra £100 a year in tax
- Higher rate taxpayer with a £50,000 savings pot could face an extra £380 in tax over a decade
Laura Suter, director of personal finance at AJ Bell, comments:
“Savers are being hit with another whopping tax increase on their savings interest – adding to the tax tsunami that’s hit them in the past few years. The combined forces of a freeze on income tax bands, higher interest rates and a frozen personal savings allowance have all dragged millions more people into paying tax on their savings – and now they are being clobbered with a tax rise as the cherry on top.
“We already know that 2.64 million people are expected to be hit with tax on their savings in the current tax year*, with one in 25 basic rate taxpayers caught in the savings tax trap. Now those individuals will be landed with a higher tax bill on their cash savings too.
“The move is presumably intended to encourage people to shift out of cash and into investing in their ISA. But it’s a blunt object that, along with increases to property and dividend income tax, raises £500 million a year on average from 2028/29.
“The move combined with the extended freeze on income tax bands means that more people will be pushed into the next tax band and in turn see a cut to their tax-free savings allowance and a hike to their tax rate. For someone with £5,000 of savings interest above their personal savings allowance, the move will cost them an extra £100 a year in tax.
“But the cumulative effect of it is seen over a number of years. A higher-rate taxpayer with a £50,000 savings pot earning 4% interest will face £380 more tax over 10 years thanks to the tax increase. For a basic-rate taxpayer this will be £135 in extra tax across that period.
“There’s no doubt that Cash ISA use will explode in the next couple of years. As more people have faced tax on their savings we’ve seen ISAs become more popular, but the double-pronged effect of higher savings tax rates and a looming plan for Cash ISAs to be restricted means savers are facing an attack on two fronts.”
How many people will be hit by savings interest tax rise?
Pensioners account for almost half (44%) of all taxpayers facing an HMRC bill for interest earned on their cash savings, data from AJ Bell FOI requests shows.
HMRC expects 1,160,000 people over state pension age to incur an income tax liability on savings this year (2025/26).
It means that pensioners account for almost half of the 2,640,000 taxpayers due to pay income tax on cash savings interest earned in the current financial year.
All taxpayers
Pensioners
* Source: HMRC/AJ Bell FOI. The 2020-21 and 2021-22 figures are based on the Survey of Personal Incomes (SPI). The 2023-24, 2024-25 and 2025-26 figures are estimates.
