Millions of savers face being caught by a record £9.1 billion tax bill on their bank interest as Labour’s higher savings tax rates collide with frozen tax thresholds.
The amount collected by the Treasury from savings interest is expected to climb from £8.2 billion this tax year to £9.1 billion in 2027-28, according to analysis by The Telegraph based on HMRC figures.
And the squeeze is set to reach millions of households, including growing numbers of pensioners who have spent years building up nest eggs.
Figures obtained by The Telegraph from HMRC under the Freedom of Information Act show an estimated 4.7 million people will be paying tax on their savings interest in 2027-28, around 200,000 more than in the current tax year.
The average bill for those caught is expected to reach a record £1,940, compared with £1,810 currently.
The looming increase follows changes announced in the 2025 Budget, which will increase Income Tax rates on savings income by two percentage points from April 2027.
The basic savings rate will rise from 20 per cent to 22 per cent, the higher rate from 40 per cent to 42 per cent and the additional rate from 45 per cent to 47 per cent. The changes have subsequently been legislated for.
It means that simply putting money aside and earning interest on it could become increasingly expensive for taxpayers already facing the effects of frozen thresholds.
The Government has also extended the freeze on the Personal Allowance and basic rate limit until April 2031. The Personal Allowance will remain at £12,570 and the higher-rate threshold at £50,270 over the extended freeze period.
As wages, pensions and savings income increase while thresholds remain fixed, more people can consequently become liable for tax, or move into higher tax bands, a phenomenon commonly described as fiscal drag.
For savers, the pressure does not end there.
From April 2027, people under 65 will also see the amount they can put into a cash ISA each year cut from £20,000 to £12,000. Those aged 65 and over will retain the £20,000 cash ISA limit, while the overall annual ISA allowance remains £20,000.
The combination leaves working-age savers with a smaller annual cash shelter at precisely the same time that tax rates on savings outside an ISA are increasing.
Under the current system, basic-rate taxpayers can receive up to £1,000 of savings interest tax-free through the Personal Savings Allowance, while higher-rate taxpayers receive a £500 allowance. Additional-rate taxpayers receive no Personal Savings Allowance.
The Government has left those allowances unchanged despite increasing the rates charged once they are exceeded.
People on lower incomes can also benefit from the starting rate for savings, potentially allowing up to £5,000 of savings interest to be received tax-free, although the amount available reduces as other income rises above the Personal Allowance.
Pensioners increasingly caught
Perhaps most strikingly, the tax net is increasingly reaching pensioners.
According to HMRC projections reported by The Telegraph, more than two million state pensioners are expected to pay tax on their savings interest in 2027-28, including 517,000 facing the 42 per cent higher savings rate.
That represents a dramatic increase from 2022-23, when The Telegraph reports that 493,000 pensioners paid tax on bank interest, including 146,000 at the higher rate.
For retirees who were encouraged throughout their working lives to save for old age, the figures will raise further questions over whether prudence is increasingly being penalised by the tax system.
Ian Futcher, of wealth manager Quilter, told The Telegraph that the Treasury was benefiting from a “perfect cocktail” of higher savings taxation and frozen allowances.
He said: “The issue could become even more pronounced if interest rates remain elevated or rise further.
“Market expectations are for additional rate increases later this year, which could boost savings returns, but could also push more people above their savings allowances and increase the amount of tax due on interest income.”
Sarah Coles, of investment platform AJ Bell, also warned of mounting pressure on savers.
She told The Telegraph: “Savers are being squeezed on all sides and the pain is only going to intensify in the next tax year.
“Those paying tax on savings includes a significant chunk of people over the retirement age, whose hard work and dedication to building a nest egg over the years is being rewarded with a tax bill.”
Labour says changes will make system ‘fairer’
The Government argues that the changes are about fairness rather than punishing saving.
Official Treasury documents say income from savings, property and dividends does not attract National Insurance in the way earnings from employment and self-employment do, and that increasing the relevant tax rates will help narrow that difference.
A Treasury spokesman told The Telegraph: “We are protecting savers through generous tax reliefs and around 85pc of people with savings income pay no tax on that income at all.
“This is while also making the tax system fairer by asking those with the broadest shoulders and the largest income from assets to contribute more to fund precious public services.”
But for millions who have done exactly what successive governments told them to do, work, save and put money aside for emergencies and retirement, the practical result is straightforward.
The Treasury is expecting to take considerably more of their savings income.
The Government’s own 2025 Budget costings estimated that increasing savings income tax rates would raise hundreds of millions of pounds for the Exchequer each year once fully implemented.
With thresholds frozen, savings tax rates rising and the cash ISA limit for under-65s being slashed by £8,000, Britain’s savers are facing another squeeze.
And with another Budget approaching, taxpayers will be watching closely to see where the Government turns next for money.
