How does Rest Less make money
We make money through advertising and commission from affiliate links, which enable us to offer Rest Less as a free service to our users. The content on this page may use affiliate links, which track traffic from our website to a third party provider and enable us to receive a commission or payment from any traffic we refer.
* Affiliate links on this page have an * next to them. We place enormous importance on our editorial independence and the integrity of our content which means that we will never change how we write about something as a result of an affiliate link.
More than 100,000 people are expected to face a tax bill of over £10,000 on their savings income this tax year, with higher interest rates pushing more cash savers above their tax-free allowances.
The number of people expected to owe five figures in tax on their savings income has almost quadrupled in just four years, according to Freedom of Information data obtained by Paragon Bank.
An estimated 109,000 people will owe more than £10,000 in tax on their savings income during 2026/27, compared with 28,000 in 2022/23, an increase of 289%.
Here, we explain why it’s vital to consider the tax implications of where your savings are held, even if you don’t think you have a big enough balance to generate a tax bill.
Why are more savers paying tax on their interest?
Savings interest was historically something most people didn’t have to worry too much about from a tax perspective, especially as interest rates were very low for several years.
However, interest rates have risen significantly from the ultra-low levels seen for much of the previous decade. While this might be good news for savers, it also means that people can now earn considerably more interest from the same amount of cash, potentially making them liable for tax on their returns.
How is savings interest taxed?
Everyone has a tax-free Personal Allowance, which is the amount of income you can receive each year before you start paying income tax. For the 2026/27 tax year, this is £12,570.
However, if you’re working or receiving an income from a pension, you’re likely to use up your Personal Allowance through your salary or pension income. This means it may not provide any additional tax-free cover for interest earned on your savings.
There’s also a separate tax break for savings interest called the Personal Savings Allowance. This allows you to earn a certain amount of interest from your savings each year without paying tax.
The amount you can earn tax-free depends on your income tax band. Basic-rate taxpayers can earn up to £1,000 in savings interest without paying tax, while higher-rate taxpayers can earn up to £500. Additional-rate taxpayers don’t get a Personal Savings Allowance.
So, for example, a higher-rate taxpayer with £50,000 in savings earning 4% interest would receive £2,000 in interest over a year. Assuming they have no other savings interest or relevant allowances, £500 would fall within their Personal Savings Allowance, leaving £1,500 potentially taxable.
It’s important to remember that it’s the interest you earn, rather than the amount you have saved, that is taxed. If you have a particularly large amount of savings generating interest, this extra income could potentially push you into a higher tax band. This makes it important to consider all your sources of income when working out how much tax you may owe.
What if you’re on a low income?
If your income is relatively low, you may be able to benefit from another tax break called the starting rate for savings.
This can allow you to earn up to £5,000 in savings interest tax-free. However, the allowance is reduced by £1 for every £1 you receive from other sources of income above your Personal Allowance.
For example, if you have £13,570 of income from sources other than savings, you would have £4,000 of your £5,000 starting rate for savings allowance remaining.
Once your other income reaches £17,570, your starting rate for savings allowance disappears completely. So, depending on your circumstances, you could potentially receive up to £5,000 in savings interest tax-free if your other income is no more than £12,570.
It’s important not to underestimate how big a tax bill you might be landed with. According to Paragon’s research, more than half a million people are expected to owe more than £2,000 on their savings income this tax year, up from 119,000 in 2022/23 and an increase of 355%.
A further 144,000 people are expected to have savings income tax liabilities of more than £5,000, compared with 52,700 four years ago.
The table below shows how the number of people expected to have significant tax liabilities on their savings income has changed over the past five years:
| Tax year | More than £2,000 tax liability | More than £5,000 | More than £10,000 |
|---|---|---|---|
| 2022/23 | 119,000 | 52,700 | 28,000 |
| 2023/24 | 363,000 | 117,000 | 73,000 |
| 2024/25 | 536,000 | 133,000 | 110,000 |
| 2025/26 | 554,000 | 137,000 | 113,000 |
| 2026/27 | 542,000 | 144,000 | 109,000 |
ISAs can shelter your savings from tax
One of the simplest ways to protect savings interest from income tax is to use a tax-efficient individual savings account (ISA).
Interest earned within a cash ISA is tax-free and doesn’t count towards your Personal Savings Allowance.
You can currently put up to £20,000 into cash ISAs each tax year if you want to, although the rules are changing from next year. They will see the amount that can be saved into cash ISAs fall to £12,000 from April 2027 for savers aged under 65. Learn more in our article What could Budget changes to cash ISAs mean for you?
Despite this change, ISAs remain particularly useful for people with larger cash savings who are earning enough interest to take them over their Personal Savings Allowance. You can find current best buy ISA rates in our guide Best cash ISA rates – which cash ISAs pay the most interest?
Remember all your savings accounts
It’s easy to underestimate how much interest you’re earning if your money is spread across several banks and building societies.
You might have money in an easy-access account, a fixed-rate bond, and perhaps an old notice savings account you’ve forgotten about.
While individual accounts may not generate a huge amount of interest, the combined total could be enough to push you over your Personal Savings Allowance.
It’s therefore worth adding up the interest you’re expecting to receive across your accounts, rather than looking at each account in isolation.
Andrew Wright, Head of Savings at Paragon Bank, said: “Hundreds of thousands of people are now facing tax bills running into thousands of pounds on their savings income. The number expected to owe more than £2,000 has risen more than fourfold since 2022-23, while almost four times as many people are facing bills above £10,000.
“Higher interest rates have delivered better returns for savers, but they also mean more people are exceeding their Personal Savings Allowance, particularly those with larger balances or income from several different accounts.”
“Savers should regularly check the interest they are earning across all their accounts and understand whether it could create a tax liability. Making use of ISA allowances and other tax-efficient options, where appropriate, can help people keep more of the return their money generates.”
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.
Join the discussion
Read our full commenting terms and guidelines