More than 100,000 could be hit with bills exceeding £10,000, according to tax office figures obtained by Paragon Bank. That's up from just 28,000 in 2022-23.
So why are more savers being caught in the tax trap and what can you do to reduce your bill?
What tax do you pay on savings?
A portion of returns is shielded from tax thanks to the personal savings allowance (PSA).
The PSA currently stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers don't have a PSA, meaning all their savings interest is subject to income tax.
Any interest that exceeds your PSA will be charged at your usual rate of income tax (20%, 40% or 45%). From 2027, however, the rate of income tax on savings interest will rise by two percentage points.
A basic-rate taxpayer will therefore be faced with a 22% charge, higher-rate taxpayers will pay 42%, and those in the additional-rate tax band will pay 47%.
Find out more:Surge in savings tax bills
The total number of people paying over £2,000 in tax on their savings income is expected to hit an estimated 542,000 in 2026-27, according to HMRC data obtained by Paragon Bank. That's four times more than the 119,000 recorded in 2022-23.
Savers owing the taxman more than £10,000 on interest income are also set to surge from 28,000 to 109,000 over the same time period.
This chart shows the estimated number of savers paying tax on interest from 2022-23 to 2026-27.
Why are more savers paying tax on interest?
In the past, only savers with a large lump sum had to worry about exceeding the PSA, but a rising number of people are facing a savings tax bill.
There are two main reasons for this:
Rising savings rates
Savings rates have hit record highs over the past few years. In October 2022, the best one-year fix offered an impressive 6.2% AER. Rates have dropped since that peak, but they are climbing again, and you can still find an equivalent account with a top rate of 5%. The result is that even savers with modest pots are facing tax bills.
This table shows how much a basic-rate and higher-rate taxpayer needs in savings, at various interest rates, before interest is taxed.
Threshold freeze
Wage increases and income tax thresholds frozen until 2031 are dragging more people into a higher tax band. These savers have a smaller PSA to play with as a result.
HMRC data shows there is expected to be 7.7 million higher-rate taxpayers this financial year. That's an increase of more than 1 million in the past two years alone and 3 million more than in 2021-22 when thresholds were first frozen.
The number of additional-rate taxpayers has more than doubled within the same time period, jumping from 520,000 to an estimated 1.3 million in 2026-27.
Not only was this band frozen at £150,000, but it was then cut to £125,140 in 2023-24. It means more people have been dragged into the top tax rate and will need to pay income tax on all of their savings returns.
There are also 4 million more taxpayers paying the basic-rate tax for the first time.
Find out more:An Isa can shield up to £20,000 from tax
An Isa is a great way to protect your savings interest or investment income from tax.
You can put up to £20,000 in a cash and/or stocks and shares Isa, and any income generated can grow completely tax-free, protecting your savings now and in the future.
Although the cash Isa limit for savers under 65 will fall to £12,000 from April 2027, the overall Isa allowance will remain at £20,000. That means under-65s wanting to use their full Isa allowance will need to invest at least £8,000 in a stocks and shares Isa.
This table shows the top cash Isa accounts, ordered by term:
| Isa type | Provider | Account name | Interest rate (AER) | Provider customer score | Minimum investment | Opening methods | Interest paid | Transfers in? |
|---|---|---|---|---|---|---|---|---|
| Instant access | Sidekick | Cash Isa | 4.61% (a) | n/a | £1 | Mobile app | Monthly | Yes |
| One-year fixed rate | RECOMMENDED_BADGE(RECOMMENDED PROVIDER); Charter Savings Bank | 1 Year Fixed Rate Cash Isa | 4.74% | 82% | £5,000 | Internet | Monthly, anniversary | Yes |
| Two-year fixed rate | Hodge Bank | 2 Year Fixed Rate Cash Isa | 4.81% | n/a | £1,000 | Internet | Monthly, anniversary | No |
| Three-year fixed rate | RECOMMENDED_BADGE(RECOMMENDED PROVIDER); Charter Savings Bank | 3 Year Fixed Rate Cash Isa | 4.83% | 82% | £5,000 | Internet | Monthly, anniversary | Yes |
| Four-year fixed rate | UBL UK | 4 Year Fixed Rate Cash Isa | 3.91% | n/a | £2,000 | Branch, internet, mobile app, postal | Monthly, quarterly, anniversary, on maturity | Yes |
| Five-year fixed rate | Furness Building Society | 5 Year Fixed Rate Isa | 4.91% | n/a | £1,000 | Branch, internet, mobile app, postal | Anniversary | Yes |