Millions of savers face income tax bill – how to protect your cash | Personal Finance | Finance

A combination of frozen income tax thresholds, the fixed Personal Savings Allowance (PSA) and higher interest rates is pushing more ordinary savers into the hands of HMRC. Many people still associate tax on savings with being extremely wealthy, but an emergency fund or house deposit can cross the allowance surprisingly quickly. New figures suggest more than 2.7million are set to pay tax on savings interest in the 2026/27 tax year, with around 144,000 facing bills of £5,000 or more.

Many will be caught after breaching their PSA. This allows basic-rate 20% taxpayers to earn £1,000 of interest each year before paying tax, falling to £500 for 40% higher-rate taxpayers. Additional-rate 45% taxpayers get no PSA. You don’t need hundreds of thousands of pounds in the bank before the taxman comes calling. A basic-rate taxpayer earning 4% interest will exceed their PSA with £25,000 in taxable, non-ISA savings accounts. A higher-rate taxpayer would hit their £500 limit with just £12,500. If they earn 5%, those balances fall to £20,000 and £10,000 respectively.

Thomas Drury, money-saving expert at The Investors Centre, said many savers don’t realise the PSA applies to the combined interest earned across all their accounts, rather than separately to each bank.

This can include interest from bank and building society accounts, credit unions, certain bonds and peer-to-peer lending. Interest earned inside an ISA doesn’t count and remains tax-free. The biggest mistake is checking each account individually, Drury said. “You might earn £300 with one bank, £250 from another and £200 from a fixed account. None looks worrying alone, but together that is £750.”

For a higher-rate taxpayer with a £500 PSA, that extra £250 would be taxed at 40%, creating a £100 tax bill. HMRC may also adjust your tax code automatically. Banks and building societies report interest paid to customers, allowing HMRC to use the information to update tax records and calculate whether tax is due.

Moving money between banks doesn’t make the interest invisible, Drury said. “Providers report the figures to HMRC, which can combine the amounts and compare them with your allowance.” HMRC may use previous interest figures to estimate what you’ll earn this year, so check any tax-code notice carefully.

If you had a large fixed account mature last year, HMRC could initially assume you will receive similar interest again, Drury said. “Equally, if your savings have increased, the estimate may be too low.” People who complete a self-assessment tax return may need to report their savings interest, depending on their circumstances and the amount of taxable interest received.

The simplest way to avoid a nasty surprise is to add up the interest you expect from every taxable account for the whole tax year. Watch out for fixed-rate accounts where interest is often paid in one go when the term ends. If you’re facing a tax bill, check whether you can shift savings into a Cash ISA, where the interest will be free of tax. And here’s another way to potentially cut your tax exposure.

Always check access requirements, interest rates and product terms before moving money purely to save tax, Drury added.