Savers hit with tax rise on cash interest, AJ Bell analysis

New analysis from AJ Bell shows frozen tax thresholds and rising interest rates are dragging more people into paying tax on their savings, with the latest 2% rise and reduced Cash ISA allowance leaving many facing higher bills.

Laura Suter, director of personal finance at AJ Bell, comments: 

“Savers are being hit with another whopping tax increase on their savings interest – adding to the tax tsunami that’s hit them in the past few years. The combined forces of a freeze on income tax bands, higher interest rates and a frozen personal savings allowance have all dragged millions more people into paying tax on their savings – and now they are being clobbered with a tax rise as the cherry on top.

“We already know that 2.64 million people are expected to be hit with tax on their savings in the current tax year*, with one in 25 basic rate taxpayers caught in the savings tax trap. Now those individuals will be landed with a higher tax bill on their cash savings too. 

“The move is presumably intended to encourage people to shift out of cash and into investing in their ISA. But it’s a blunt object that, along with increases to property and dividend income tax, raises £500 million a year on average from 2028/29.

“The move combined with the extended freeze on income tax bands means that more people will be pushed into the next tax band and in turn see a cut to their tax-free savings allowance and a hike to their tax rate. For someone with £5,000 of savings interest above their personal savings allowance, the move will cost them an extra £100 a year in tax. 

“But the cumulative effect of it is seen over a number of years. A higher-rate taxpayer with a £50,000 savings pot earning 4% interest will face £380 more tax over 10 years thanks to the tax increase. For a basic-rate taxpayer this will be £135 in extra tax across that period.

“There’s no doubt that Cash ISA use will explode in the next couple of years. As more people have faced tax on their savings we’ve seen ISAs become more popular, but the double-pronged effect of higher savings tax rates and a looming plan for Cash ISAs to be restricted means savers are facing an attack on two fronts.” 

How many people will be hit by savings interest tax rise? 

Pensioners account for almost half (44%) of all taxpayers facing an HMRC bill for interest earned on their cash savings, data from AJ Bell FOI requests shows.

HMRC expects 1,160,000 people over state pension age to incur an income tax liability on savings this year (2025/26). 

It means that pensioners account for almost half of the 2,640,000 taxpayers due to pay income tax on cash savings interest earned in the current financial year. 

All taxpayers 

The total number of people with Income Tax liabilities on savings income
Tax year	Savings rate	Basic rate	Higher rate	Additional rate	Total
2022-23	21,400	494,000	405,000	301,000	1,220,000
2023-24	39,600	1,000,000	720,000	458,000	2,220,000
2024-25	41,700	1,130,000	839,000	513,000	2,520,000
2025-26	40,500	1,150,000	897,000	548,000	2,640,000
Source: HMRC/AJ Bell FOI. The 2022-23 figures are based on the Survey of Personal Incomes (SPI). The 2023-24, 2024-25 and 2025-26 figures are estimates, projected in line with economic assumptions consistent with the OBR’s March Outlook.

Pensioners 

The total number of pensioners with Income Tax liabilities on savings income
Tax year	Savings rate	Basic rate	Higher rate	Additional rate	Total
2022-23	8,100	305,000	146,000	33,300	493,000
2023-24	16,200	622,000	253,000	62,000	953,000
2024-25	17,300	710,000	295,000	72,900	1,090,000
2025-26	16,500	731,000	328,000	80,800	1,160,000
Source: HMRC/AJ Bell FOI. The 2022-23 figures are based on the Survey of Personal Incomes (SPI). The 2023-24, 2024-25 and 2025-26 figures are estimates, projected in line with economic assumptions consistent with the OBR’s March Outlook.

* Source: HMRC/AJ Bell FOI. The 2020-21 and 2021-22 figures are based on the Survey of Personal Incomes (SPI). The 2023-24, 2024-25 and 2025-26 figures are estimates.