Millions are being pulled into paying tax on their nest eggs as frozen allowances and higher interest rates combine to erode protections once meant to shield them.
Experts warn that so-called “fiscal drag” is quietly dragging ordinary households into the taxman’s net, with many now breaching limits that have remained unchanged for a decade. The Personal Savings Allowance (PSA), introduced in April 2016, allows basic-rate taxpayers to earn up to £1,000 in savings interest tax-free, while higher-rate taxpayers can earn just £500. Additional-rate taxpayers get no allowance at all.
But despite a sharp rise in interest rates over recent years, the thresholds have been left frozen – meaning more savers are now exceeding them.
Analysis from Moneyfactscompare.co.uk shows someone who locked £20,000 into a top one-year bond paying 4.58% would earn £916 in interest over a year. That comfortably breaches the £500 PSA for higher-rate taxpayers and comes close to the £1,000 limit for basic-rate taxpayers.
By contrast, the same £20,000 placed in a leading cash ISA paying 4.45% would generate £890 completely tax-free.
The growing squeeze is compounded by income tax thresholds being frozen, pushing more workers into higher-rate bands where the PSA is cut in half from £1,000 to £500 – a 50% reduction.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Cash ISAs have proven their worth to savers over many years, especially as fiscal drag causes millions to breach their Personal Savings Allowance (PSA).
“April marks the 10-year anniversary of the PSA, and while it protected savings interest from tax when it was launched for many, it’s outdated and needs to change.”
She added: “Interest rates are higher than back then, and more savers are expected to see their savings income taxed in the years ahead due to fiscal drag.
“Those basic-rate taxpayers dragged into the higher-rate tax band at 40% will see their PSA halved, to £500. This means even someone building a house deposit will pay tax on a standard savings account, but not if it is held in an ISA.”
The warning comes as many savers remain unaware of the rules. Research by Yorkshire Building Society found 36% of people have never heard of the PSA.
Over the past decade, basic-rate taxpayers alone have paid more than £4.7bn in tax on their savings interest, underlining how the allowance has failed to keep pace.
Ms Springall said: “Savers who locked £20,000 into the top one-year fixed bond of 4.58% back in March 2025 would receive annual interest of around £916.
“This return in savings interest is shielded from tax due to the PSA for a basic-rate taxpayer, but only £500 is safe for higher-rate taxpayers.”
She added that with ISA rates now broadly competitive during the end-of-tax-year rush, many households should consider sheltering their savings before the deadline.
“Someone who has or is about to move up an income tax band would be wise to use up their cash ISA allowance, or lose it, as it resets on 6 April,” she said.
The broader trend highlights a shift in household finances, with the UK savings ratio rising to 10.2% in the second quarter of 2025, up from 6.8% in the same period in 2016, according to official figures.
Ms Springall said: “The past 10 years have shown consumers the importance of building a healthy nest egg to help brave economic storms… Those extra savings need to be put into the right place, so it is wise to seek advice to make sure any interest earned from pots is as tax-efficient as possible.
“Unfortunately, over a third (36%) of people have never heard of the PSA… This shows how the PSA has not moved along with the times.”