For years, hardly anyone I knew worried about tax on savings interest. Rates were so low that a year of interest barely bought you a coffee. That’s changed fast. Better rates, frozen thresholds and a fresh tax rise on the way mean ordinary savers are now getting letters from HMRC.
HMRC figures obtained by Paragon Bank and reported by Which? in September 2026 show around 542,000 people are expected to pay more than £2,000 in tax on their savings this tax year. Back in 2022/23 it was 119,000. That’s more than four times as many people in four years.
So let’s break down what’s going on, who it hits, and how you can keep more of your interest for yourself.
How Tax on Savings Interest Works in the UK
Most of us get some interest tax free before HMRC takes a slice. That comes from three allowances, and which ones you get depends on your income.
The Personal Savings Allowance Explained
Your personal savings allowance is set by your income tax band:
- Basic rate taxpayers get £1,000 of interest tax free
- Higher rate taxpayers get £500 tax free
- Additional rate taxpayers get nothing at all
Anything above your allowance is taxed at your normal income tax rate.
The Starting Rate for Savings
If your other income is low, you could get up to £5,000 of interest tax free on top. However, this shrinks by £1 for every £1 you earn above £12,570. Once your other income hits £17,570, it disappears completely.
Why More Savers Are Getting Caught Out
Here’s the sneaky part. The savings allowance hasn’t gone up since it was introduced in 2016. On top of that, income tax thresholds are frozen until 2031. So as wages rise, more people slip into the higher rate band and watch their allowance halve overnight.
In fact, Which? reports HMRC expects 7.7 million higher rate taxpayers in 2026/27. That’s about 3 million more than in 2021/22. Nobody voted for that. It just happened quietly in the background, which is exactly how the Treasury likes it.
The 2027 Savings Tax Rise: What’s Changing
The November 2025 Budget piled on another change. From April 2027, the tax rates on savings interest rise by two percentage points:
- Basic rate goes from 20% to 22%
- Higher rate goes from 40% to 42%
- Additional rate goes from 45% to 47%
These rates apply in Scotland too. Scottish income tax bands don’t cover savings income, so everyone in the UK pays the same savings rates.
At the same time, under 65s will only be able to put £12,000 a year into a cash ISA from April 2027. The overall ISA allowance stays at £20,000. I’ve covered that in detail in my ISA deadline guide.
How Much Can You Save Before You Pay Tax?
This is where most people get caught. You really don’t need a big pot to go over your allowance.
According to Which?, at a 4% interest rate:
- A basic rate taxpayer goes over the limit with roughly £25,000 saved
- A higher rate taxpayer goes over it with just £12,500 saved
That’s a decent emergency fund or a house deposit. It’s not millionaire money.
A Real World Example
Let’s say you’ve got £40,000 in a savings account paying 4%. That earns you £1,600 a year in interest.
For a basic rate taxpayer, £600 of that is taxable. You’d pay £120 now, rising to £132 from April 2027.
A higher rate taxpayer would have £1,100 taxed. They’d pay £440 now, rising to £462.
Meanwhile, an additional rate taxpayer pays tax on the whole £1,600. That’s £720 now, rising to £752.
It grates on me. This is money taken from people who did the sensible thing and put cash aside.
How HMRC Collects Tax on Your Savings
Usually, you don’t have to lift a finger. Your bank reports your interest to HMRC after each tax year ends. If you’re employed or get a pension, HMRC normally collects what you owe by adjusting your tax code.
If that isn’t possible, you might get a Simple Assessment letter telling you how much to pay. Anyone with interest over £10,000 will need to file a Self Assessment return. The full rules are on GOV.UK’s tax on savings interest page.
One thing to watch. HMRC often estimates this year’s interest using last year’s figures. If you’ve spent some of your savings since, that estimate could be too high. Check your tax code in your Personal Tax Account and ask HMRC to fix it if it looks wrong.
6 Legal Ways to Cut Tax on Savings Interest
Now for the good bit. There are plenty of simple ways to protect your interest from the taxman.
Step 1: Use Your ISA Allowance First
Interest inside an ISA is completely tax free and doesn’t eat into your allowance. If you’re under 65, it’s worth thinking about filling your cash ISA before April 2027 while the full £20,000 limit still applies.
Step 2: Look at Premium Bonds
Premium Bond prizes are tax free, and you can hold up to £50,000. The catch is there’s no guaranteed return. My Premium Bonds guide covers whether they’re actually worth it.
Step 3: Share Savings With Your Partner
Married couples and civil partners can move money between each other with no tax to pay. So if your partner pays a lower rate of tax, keeping some savings in their name could cut your household bill.
Step 4: Pay More Into Your Pension
Pension contributions reduce your taxable income. If you’re just over the higher rate threshold, this could pull you back into the basic rate band. That doubles your savings allowance back to £1,000. My guide to salary sacrifice pensions explains how it works.
Step 5: Be Careful With Fixed Rate Bonds
Some fixed term bonds pay all the interest at the end. A two year bond could drop two years of interest into a single tax year and push you over your allowance. If you’re close to the limit, pick accounts that pay interest monthly or yearly instead.
Step 6: Don’t Let Tax Scare You Into Bad Rates
Paying a bit of tax on good interest still beats earning nothing. Don’t let the tax put you off saving altogether. As I explain in why inflation is draining your savings, cash stuck on a poor rate loses value every single year.
Your cash ISA allowance is also changing. From April 2027, under 65s will only be able to put £12,000 a year into a cash ISA, so read my guide to the new cash ISA limit before you plan next year’s savings.
Is Tax on Savings Interest Here to Stay?
Realistically, yes. Freezing thresholds is one of the government’s favourite ways to raise money without ever calling it a tax rise. The 2027 changes make it clear that savers are firmly in the firing line.
Healey could add more changes on 28 October. Here’s what the Autumn Budget 2026 could mean for your savings.
That said, the answer isn’t to stop saving. It’s to save smarter. Use your ISA, keep an eye on your tax code and spread your money across tax efficient options. For more ideas, have a read of my guide on how to pay less tax in the UK legally. For the bigger picture, my UK tax guide and saving and budgeting guide are good next reads.
This post is for general information only and isn’t financial advice. Everyone’s situation is different, so check the rules on GOV.UK or speak to a qualified adviser before making any decisions.