Millions of households with savings accounts have been issued a £1,000 warning as rising interest earnings leave more people at risk of unexpected tax bills. Basic-rate taxpayers can earn up to £1,000 in savings interest each tax year before tax is due, but any interest above that amount may be taxed.
The allowance falls to £500 for higher-rate taxpayers, while additional-rate taxpayers receive no tax-free allowance at all on savings held outside an ISA. New figures suggest HMRC will collect £8.2 billion in tax on savings interest in 2026/27, more than four times the £2 billion raised just four years earlier. Charlene Young, senior pensions and savings expert at AJ Bell said: “Tax bills on investment income will hit almost £20 billion this year thanks to increases in dividend tax rates for basic rate and higher rate investors at the start of the tax year.
“Rachel Reeves announced a dividend tax rate increase of 2% for basic and higher rate taxpayers from April this year, another blow to investors following hot on the heels of brutal cuts to the tax-free dividend allowance under the last government.
“The order of taxation means that income from savings and investments sits on top of people’s earnings and forms the highest slice of their total income. When it comes to savings, frozen income tax thresholds mean more people are finding themselves taxed at higher rates, even when their overall spending power has not increased by the same amount.”
She added: “Savings income will account for around 2.4% of the total income tax take in the UK in 2026/27, an increase on the year before.
“This is no surprise when you consider the personal savings allowance has been stuck at £1,000 for basic rate taxpayers since it was introduced over a decade ago.
“Those who tip into the higher rate tax band will have an allowance of just £500 while additional rate taxpayers get nothing at all, meaning they face a 45% tax charge on their savings outside of tax wrappers.”
These allowances apply to the amount of interest earned, rather than the total balance held in an account.
At an interest rate of 4%, a basic-rate taxpayer would reach the £1,000 threshold with savings of around £25,000, while a higher-rate taxpayer could exceed their £500 allowance with £12,500.
Ms Young added: “When the tax-free allowance for dividends was introduced in 2016, it sat at £5,000, shielding most smaller retail investors.
“But since the last tax year, it has sat at just £500, meaning these same investors now face a tax bill on investments they don’t hold within a Stocks and Shares ISA.”