In April 2016 the Personal Savings Allowance arrived as a small courtesy to British savers. Easy-access accounts then paid one per cent or less, so a basic-rate taxpayer could hold £100,000 in a typical account and never trouble the taxman. Today the same courtesy has turned into a trap.
Yorkshire Building Society’s latest analysis puts the scale in a single comparison. In January 2018, 462,000 non-ISA savings accounts were on course to earn more than £1,000 in a year. The society forecasts 5.3 million for January 2026, a rise of 1,047%. Note that these are accounts, not people.
Why the allowance stopped working
The allowance has stood still while the world around it moved. Basic-rate taxpayers may earn £1,000 in savings interest in a tax year before tax applies, higher-rate taxpayers £500, and additional-rate taxpayers nothing at all. Interest above those limits is taxed at the saver’s usual income tax rate. Meanwhile the typical easy-access account now pays at least three per cent. At four per cent, a basic-rate saver breaches the allowance with around £25,000 in the bank.
Manchester Evening News reported that inflation, higher interest rates and frozen thresholds all pushed the same way. It is fiscal drag in its plainest form: no one raised a tax rate, yet the tax take rises.
Tina Hughes, who directs savings at Yorkshire Building Society, called the shift “staggering”. “This isn’t about people suddenly becoming wealthy,” she said. “It’s about a frozen allowance colliding with much higher interest rates.” People putting money aside for a house, a rainy day or later life were, she argued, “now being punished by outdated rules”, and she said the allowance urgently needs reform.
Rachel Springall of Moneyfactscompare, a comparison site, agreed that savers are earning more but are also increasingly exposed to tax through fiscal drag. That millions of accounts have become liable in five years, she said, shows the allowance has not moved with the times and badly needs review.
The older saver
Retirees feel it sharply. Yorkshire Live, citing Birmingham Live and a Freedom of Information request Paragon made to HMRC, says 2.1 million people over 65 are expected to get an income tax bill on their savings, against 517,000 in 2022/23. The projected bill for the group is £3.34 billion in 2026/27, up from £795 million four years earlier.
For those near the limit there is one clear exit. Interest inside an ISA is free from tax, and up to £20,000 a year can go into one ISA or be split across several.
Sources
- HMRC tax bill warning for 5.3 million people with savings accounts (Yorkshire Live)
- Savers issued warning as more than 5 million accounts at risk of tax bill (Manchester Evening News)
