Millions of savers to face unexpected tax bills

Millions of savers face shock tax bills this year as HMRC claws back billions due to frozen tax thresholds and rising interest rates. Official figures reveal that more than 2.6 million people will be forced to pay tax on the interest earned from their savings in the 2025-26 financial year - up by more than 120,000 on the previous year.

Amongst them are 1.15 million basic-rate taxpayers, many of whom will be unaware they are now liable for a bill - despite being far from well-off. The number affected has rocketed from just 800,000 in 2020-21, when interest rates were far lower.

Analysis by investment firm AJ Bell shows that the average tax bill for those caught in the trap is £2,300, with the total haul for the taxman expected to exceed £6 billion this year - more than four times the amount raised five years ago. The surge is being blamed on a toxic combination of frozen allowances and higher interest rates, which have handed savers a modest return on their money - only for much of it to be taken away again in tax.

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Under current rules, basic-rate taxpayers can earn up to £1,000 in savings interest before being taxed. But with some savings accounts paying 5 per cent, someone with £20,000 in the bank could now find themselves liable for tax.

Higher-rate taxpayers see their allowance halved to £500, while additional-rate taxpayers - those earning over £125,140 - get no tax-free allowance at all. Crucially, these thresholds have not been increased since 2016, meaning inflation and wage growth have dragged more and more savers into the net.

Meanwhile, ISAs remain the only major tax shelter - but even that has come under threat in recent months. In July, Chancellor Rachel Reeves was expected to unveil plans to reform the popular £20,000-a-year tax-free ISA limit in a bid to push more investment into UK companies. However, after a fierce backlash from savers and building societies, the announcement was shelved.

A Treasury spokesperson has since insisted: “We are protecting the £20,000 tax-free yearly ISA savings limit, meaning the vast majority of people will continue to pay no tax on their savings.”

Adding to the controversy is HMRC’s struggle to track who owes what. In documents released earlier this year, the Revenue admitted that in up to one in five cases, information provided by banks and savings providers was “unreadable”.

Ms Suter said: “HMRC says it cannot reconcile bank account interest with taxpayer data in around a fifth of cases, costing hundreds of millions in uncollected tax revenue. While that’s a win for the lucky taxpayers who are let off the hook by HMRC’s systems, it illustrates that the current approach is error-prone.”

Consequently, the Government now intends to compel savings providers to gather National Insurance numbers from customers to enhance data-matching and enforcement. The crackdown arrives alongside broader worries that millions more will be pulled into paying tax as the Government maintains frozen income tax thresholds until 2028 - a policy initially brought in under the Conservatives and silently kept by Labour.

With typical one-year fixed savings rates still hovering around 4%, and easy-access accounts providing nearly 2.7%, savers are being encouraged to explore tax-free options like ISAs - whilst they remain available.