Savers are being warned to act before April 5 to ensure they are not paying unnecessary tax. Paragon Bank is encouraging savers to maximise their cash ISA allowances, as fresh HMRC data reveals that more than 1.4 million basic rate taxpayers are facing an average tax bill of £641 on their savings interest.

Following a Freedom of Information request to the tax authority, Paragon Bank disclosed that the number of people liable for tax on their savings had more than doubled in just three years, surging from 1.27 million in 2022/23 to 2.79 million in 2025/26. Basic rate taxpayers are particularly affected, with numbers rising dramatically from 613,000 in 2022/23 to 1.42 million in 2025/26, representing a staggering 132% increase.

Government figures indicate that savers in this tax bracket will pay an average of £641 in Income Tax on their savings. With savings rates remaining highly competitive and the Personal Savings Allowance (PSA) frozen, an ever-growing number of savers are exceeding the tax-free threshold, leaving their interest subject to tax at either 20%, 40% or 45%, depending on their income bracket.

Paragon revealed that FOI findings demonstrated that as interest rates climbed following the 2022 mini-Budget, the number of higher-rate taxpayers liable for savings tax surged from 387,000 in 2022/23 to 883,000 in 2025/26, with the average payment for this tax year expected to reach £2,030. Nearly half a million additional rate taxpayers are also anticipated to face savings tax this tax year (479,000), compared to 271,000 in 2022/23, with the average bill projected at £6,990.

Cash ISAs enable savers to accumulate interest entirely free of Income Tax, regardless of rate increases or alterations to the PSA. With growing numbers of customers building larger balances amid favourable savings conditions, Paragon noted that the ISA wrapper remained amongst the most efficient means of protecting returns from taxation.

Currently, savers are permitted to deposit £20,000 per tax year into a cash ISA – meaning anyone with remaining allowance can maximise their tax-free interest by utilising it before the tax year concludes on April 5, 2026. From 2027, regulations will change, restricting cash ISA deposits to a maximum of £12,000 annually, though the overall limit of £20,000 remains unchanged. The remaining £8,000 will need to be placed into an alternative type, such as a stocks and shares ISA.

‘Surprise’ letter from HMRC

Andrew Wright, head of savings at Paragon Bank, said: “More people than ever are being drawn into paying tax on their savings and a letter from HMRC risks catching many by surprise. With the number of taxpayers on savings interest rising so sharply, it’s never been more important for savers to consider using cash ISAs.

“The tax-free status of ISAs means savers keep every pound of interest they earn, providing certainty and protection at a time when allowances are frozen and interest rates remain competitive.

“The 132% rise in basic‐rate taxpayers paying tax on savings interest is likely being driven by retirees, people with modest incomes but meaningful savings balances. Our separate FoI request shows individuals aged 65 plus are forecast to pay £2.5 billion in tax on their savings interest in 2025/26, a 215% increase on 2022/23.

“Many pensioners depend on savings interest to support their income, but frozen Income Tax thresholds and unchanged Personal Savings Allowances are pulling more people into a part of the tax system originally designed for wealthier individuals.

“With tax on savings income due to increase from April 2027, that pressure will only intensify at a time when households are still contending with the effects of inflation.

“More mature savers value the stability of cash and have saved prudently over many years to build financial resilience, so it’s unfair they are being punished through a tax system not initially designed for them.”

For those paying the higher rate of tax, the PSA stands at just £500, which means even relatively small savings can trigger a tax liability. Basic rate taxpayers receive a PSA of £1,000, while additional rate taxpayers receive no PSA whatsoever.

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