Anyone making more than £1,000 on their savings has to pay income tax on proceeds, with the threshold lowering the higher up the income tax bands you are.

The number paying tax on their investments from the 2024/25 year was previously expected to hit 2.7 million, but has since been revised down to 1.9 million. This could be down to many factors, including more people using a cash ISA to protect their savings from tax, fewer people switching into higher interest savings accounts, and interest rates being lower than HMRC initially projected.

Either way, the figure is up from around 650,000 in 2021/22.

The Bank of England base rate stands at 3.75% (as of July 2026). This follows a cut from the previous rate of 4.00% as the Monetary Policy Committee continues to adjust to falling inflation levels.

Relatively high interest rates are generally passed on to savers, giving a boost to their accounts after years of rock-bottom returns. But this higher return also means more are likely to exceed the Personal Savings Allowance, especially because it hasn't changed since it was introduced eight years ago.

The amount of tax paid is also exacerbated because income tax bands have been frozen since April 2021 despite rising wages, pushing more people into the higher and additional rate bands which not only raises the percentage of tax they have to pay on interest made, it also lowers their Personal Savings Allowance. The combination of frozen personal savings allowances, frozen income tax bands, and higher interest rates has meant more savers are facing a tax bill on their savings interest than in previous years.

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If we only look at basic rate taxpayers, then nearly 1 million basic-rate taxpayers are expected to be hit with tax on their savings interest this year, up from just half a million in the 2022/23 tax year according to AJ Bell.

It estimated around 1 in 30 basic-rate taxpayers are expected to pay tax on their savings this year, up from less than 1 in 100 three years ago. And 1 in 10 higher-rate taxpayers are expected to pay the tax now, compared to around 1 in 25 just three years ago.

How tax on savings interest works

Each person can earn a certain amount of interest on their savings before paying tax on it. Above that threshold, savings interest is taxed as income, at the rate corresponding to their income tax band.

Interest earned within an ISA is exempt from tax and does not count towards these allowances.

There is also a starting rate for savings of up to £5,000 for people whose other income is below £17,570. The full £5,000 allowance applies to anyone whose income does not exceed the personal allowance of £12,570, and reduces by £1 for every £1 of other income above that level. For more detail, see HMRC's guidance on the starting rate for savings.

Tax rules on declaring savings interest depend on your circumstances. As a general guide, those who complete a self-assessment tax return must declare savings interest there. For PAYE employees, HMRC may instead collect any tax owed by adjusting your tax code, using interest figures reported directly by banks and building societies. If you are unsure whether you need to declare savings interest, see HMRC's guidance on tax on savings interest.

How to avoid tax penalties on savings

There are a few ways to save money while lowering your tax burden.

1. Premium Bonds

Because Premium Bonds don't pay interest, tax isn't charged (on savings up to £50,000).

Instead, the NS&I bonds offer the chance for investors to win up to £1 million every month.

The current Premium Bonds prize fund rate is 3.80% (from the July 2026 draw), though this does not guarantee a return.

Each £1 bond is entered into a draw every month, with prizes starting at £25. Prizes are free from income tax.

However, unlike standard savings accounts with a guaranteed interest payment every year, there is no promise of making any money.

2. ISAs

ISA savers can invest up to £20,000 a year and don't need to pay tax on any interest in the account.

Savers have been piling into ISAs in record numbers. In April 2025, a total of £14 billion was contributed to ISAs in a single month, the highest figure since records began in 1999, according to the Treasury Select Committee. Cash ISAs alone attracted almost £70 billion in the 2023/24 tax year, a 67% increase year-on-year, driven largely by higher interest rates making tax-free cash savings more attractive (HMRC Annual Savings Statistics, September 2025).

Outside of ISAs, capital gains tax applies when you sell shares for a profit. The annual CGT exempt amount is currently £3,000 (2026/27). The dividend allowance is currently £500 per year.

3. Top up your pension

You can contribute up to 100% of your annual earnings, up to a maximum of £60,000 per tax year, into a pension without paying tax on contributions. You also receive tax relief on anything you put in.

Ordinarily, HMRC would charge you income tax on money earned, but because that money is protected from tax, it's essentially cheaper to save.

Say you had £100 to save into your pension.

If you kept that as income, a basic rate taxpayer would only get £80 back (the other 20% goes to the taxman).

A higher rate taxpayer would only get £60 (40% would be paid to the taxman).

Those who took the money as income and then chose to save it would actually have less money to save.

But when putting that money into your pension, the whole £100 remains in tact and you get tax relief. So your £100 in savings savings only cost you £80 (or £60 for higher rate taxpayers).

Many savers are missing out on higher rates

While many savers are being forced to pay more tax, some are not taking advantage of higher interest rates.

Laura Suter, director of personal finance at AJ Bell, said: "Lots of cash savers are still apathetic when it comes to their savings. Despite interest rates having soared many people have left their money sitting in old savings accounts earning very little or no interest.

"While this means people are less likely to hit their tax-free limit for savings income, it does mean they aren’t maximising their returns on cash."

Read more on the bank accounts you could switch to here: £276bn of savings earning zero interest - best accounts to switch to today

Read more:

• NimbleFins Best Savings Accounts Guide

• NS&I Premium Bonds prize rate raised to highest level in 15 years - are they worth buying?

• Average Household Savings & Wealth UK