Millions more savers are expected to pay tax on their savings income this year as frozen tax thresholds and relatively high interest rates combine to bring more people into the tax net.
HMRC originally forecast that around 2.7 million people would pay tax on their savings income during 2026/27. That estimate has now risen to approximately 4.5 million.
For many of those affected, receiving a tax bill on their savings may be unfamiliar. It also highlights why tax planning around cash savings and investments is becoming increasingly important.
One of the biggest factors is fiscal drag.
Rather than tax rates increasing, frozen allowances and thresholds mean that rising salaries, pensions and other income can gradually move people into higher tax bands.
This can have a particularly noticeable effect on savings income because your Income Tax band also determines the amount of interest you can receive tax free through the Personal Savings Allowance.
Basic rate taxpayers can currently receive up to £1,000 of savings interest without paying tax. For higher rate taxpayers, that allowance falls to £500, while additional rate taxpayers receive no Personal Savings Allowance at all.
Someone moving from the basic to higher rate band could therefore find themselves paying a higher rate of tax while simultaneously seeing their tax-free savings allowance cut in half.
Savers have benefited from stronger interest rates in recent years, but better returns can also mean reaching the Personal Savings Allowance much sooner.
For example, someone earning 5% interest would need savings of around £20,000 to generate £1,000 of annual interest. For a higher rate taxpayer with a £500 allowance, it would take only around £10,000 at the same rate before interest exceeded their allowance.
The figures will vary depending on the interest rate and an individual's wider income, but they demonstrate why tax on savings is no longer something that affects only those with very large cash balances.
The outlook changes again from 6 April 2027, when tax rates applying to savings income are due to increase by two percentage points.
For people already paying tax on their interest, this will increase the importance of considering where savings and investments are held and whether available tax allowances are being used effectively.
Capital Gains Tax has also become a greater consideration for investors following reductions to the annual exempt amount and changes to CGT rates.
Taken together, these changes make it increasingly important to consider savings, investments and tax planning as part of the same financial picture rather than looking at each in isolation.
For individuals with more substantial investment portfolios or surplus funds that they do not need to access personally, it may also be worth considering whether holding investments through a company structure could form part of their longer-term planning.
The tax treatment of investments held by a company differs from that applying to an individual and, depending on the assets held and how returns are generated, there can be circumstances where a corporate structure is beneficial. This can be particularly relevant where investment returns are intended to remain within the company and be reinvested over a longer period.
However, setting up a company purely to hold investments is not automatically more tax efficient. Corporation Tax, the treatment of different types of investment income and gains and the potential personal tax cost when money is eventually extracted from the company all need to be considered.
There are also wider tax, administrative and investment considerations. The decision should therefore be based on the individual's circumstances, the size and nature of the portfolio and what they ultimately intend to do with the funds.
For years, many savers have been able to hold money in conventional savings accounts without giving the tax consequences much thought. For a growing number of people, that is changing.
Higher interest rates are good news for savers, but frozen thresholds mean more of those returns can potentially be exposed to tax.
That does not necessarily mean moving money simply to avoid a tax bill. Cash savings can play an important role in a wider financial plan and decisions should be based on your circumstances, objectives and attitude to investment risk.
However, it does make reviewing how your savings and investments are structured worthwhile. Making appropriate use of ISAs and other available allowances should usually be considered alongside the wider structure of an investment portfolio. For those with larger sums to invest, that review might also include whether personal ownership remains appropriate or whether a corporate structure merits consideration.
The important point is to look at the overall tax position and long-term objectives, rather than focusing on a single tax rate or allowance.
Details of the current Income Tax rates and Personal Allowances can be found here:
Income Tax rates and Personal Allowances
All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.
