Savings rule change as millions more to be hit with tax bills

Millions of savers face an unexpected raid on their nest eggs as the number dragged into paying tax on interest quadruples in just four years.

New HMRC figures, obtained by AJ Bell through a Freedom of Information request, reveal that 2.64 million people will be taxed on their savings in 2025/26 - up from only 647,000 in 2021/22.

It means one in 15 taxpayers will now see part of their interest swallowed by the taxman - a levy that just a few years ago affected only the better-off.

The surge has been fuelled by the freeze on the Personal Savings Allowance (PSA) - unchanged since it was introduced in 2016 - combined with the sharp rise in interest rates.

The PSA lets basic-rate taxpayers earn £1,000 interest tax-free, while higher-rate taxpayers get just £500. Additional-rate taxpayers pay tax on every penny of interest earned outside ISAs.

Basic-rate taxpayers hit by the savings tax will more than double from 494,000 in 2022/23 to 1.15 million in 2025/26. Higher-rate taxpayers affected will rocket from 405,000 to 897,000 over the same period.

AJ Bell also found HMRC is demanding tax from far more savers than it predicted just a year ago - with 2.52 million expected to be hit this year, compared with its earlier forecast of 2.1 million.

Laura Suter, AJ Bell's Director of Personal Finance, said: "For years, most savers didn't give a second thought to paying tax on their interest - rates were low and the Personal Savings Allowance offered a generous cushion.

"But the landscape has changed rapidly. A combination of rising interest rates, frozen tax thresholds, more people being pushed into higher tax bands, and years of cash ISAs being overlooked by savers means many are now being pulled into the tax net for the first time."

The cash grab is proving highly lucrative for the Treasury. Britons will earn around £20 billion in interest from non-ISA accounts this year - more than four times the figure five years ago - handing the Government more than £6 billion in tax.

Figures show the average saver hit by the levy is paying £2,300 in tax on interest, at an average effective rate of around 31 per cent once allowances are taken into account.

Ms Suter said: "These numbers highlight how the rising tide of interest rates has swept hundreds of thousands more savers into the tax bracket.

"The government may be benefitting from increased revenue, but many ordinary savers are worse off. Using tax wrappers like cash ISAs or investment ISAs is now more important than ever to protect your savings from the taxman."

Those who exceed their PSA often only discover the penalty when HMRC adjusts their tax code - cutting their take-home pay.

The taxman relies on banks sending spreadsheets of interest payments, which are then matched against its records, but around a fifth of accounts can't be reconciled - meaning some may escape the charge altogether while others risk overpaying.