Multitudes of savings account holders braced for an unseen financial levy
In the past few years, the tax burden on savings in the UK has seen a significant increase due to a combination of rising interest rates and the freezing of income tax bands. This trend has resulted in more savers paying higher taxes on their interest income and reducing the net yield on savings.
From 2021 to 2025, the average effective tax rate on savings income has risen from about 29.4% to approximately 30.7%. This increase in effective tax rates is not due to a change in statutory rates, but rather a reflection of more savers breaching allowances due to higher interest and frozen income tax bands. As a result, the average tax paid per saver increased from around £2,090 to £2,300 over the same period.
One of the key factors contributing to this increase is the sharp rise in interest rates on savings accounts. For example, the top easy-access savings account interest rate increased from 0.65% in December 2021 to about 5.1% in August 2025. This means that a basic-rate taxpayer needs only £19,600 in savings to fully use their £1,000 tax-free allowance, down from needing £154,000 when interest rates were lower. Similarly, for higher-rate taxpayers, the savings threshold to hit their £500 allowance fell significantly.
As a consequence, the number of people paying tax on savings interest has increased by hundreds of thousands. In 2025-26, about 2.6 million savers are expected to pay tax on savings interest—up from 2.52 million the previous year—and over 3.35 million overall are projected to pay tax on savings interest. This rise in people taxed on savings interest is due to the fiscal drag caused by frozen tax thresholds, meaning millions more taxpayers will be dragged into higher tax bands despite only modest increases in their income.
This trend creates challenges for savers dependent on interest income, particularly retirees. As interest income rises but tax bands remain fixed, many savers—especially basic-rate taxpayers—are paying more tax on what was traditionally a lightly taxed form of income. This effectively reduces the net return on cash savings, disproportionately affecting those relying on interest income.
The government has been urged to 'protect' savers from the impact of increased tax burdens. Harriet Guevara, chief savings officer at Nottingham Building Society, believes reform should focus on simplifying and strengthening cash ISAs, not introducing new barriers or caps. However, the Treasury was thought to be considering reducing the cash ISA allowance, which could derail Labour's homebuilding ambition.
Prime Minister Sir Keir Starmer has promised not to hike income tax but has refused to rule out extending the freeze, which is often referred to as a "stealth tax". The Chancellor has put reforms to cash ISAs 'on hold', but the debate around savings taxation and its impact on savers continues.
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