How switching your bank account could earn you up to £220

Over five million UK savings accounts are now at risk of being hit with a tax bill as savers are being urged to review their finances. The issue stems from a combination of rising interest rates, inflation, and frozen tax thresholds, which have left many savers vulnerable to unexpected tax liabilities. According to new analysis by Yorkshire Building Society, the number of non-ISA savings accounts forecast to earn over £1,000 in interest, thus potentially triggering a tax bill, has surged by 1,047% in the past eight years. In January 2018, approximately 462,000 accounts fell into this category, but the figure has now climbed to 5.3 million. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before taxes apply, while higher-rate taxpayers face a lower threshold of £500. Additional rate taxpayers, who earn over £125,140, receive no tax-free allowance. These thresholds have remained unchanged since 2016, despite significant increases in savings returns. As a result, savers who once had room to grow their funds without worrying about tax are now finding themselves caught off guard. For example, in 2016, basic-rate taxpayers could safely save £100,000 in a standard account, but today, they can only save around £25,000 at 4% interest without exceeding their tax-free limit. HMRC figures obtained via the Freedom of Information Act reveal that 4.51 million people are projected to owe income tax on savings income in the 2026/27 tax year, a nearly fourfold increase from 1.22 million in 2022/23. Pensioners are among the hardest-hit groups, with 2.1 million individuals aged 65 and older expected to face tax bills. This surge is attributed to both higher savings rates and stagnant tax thresholds. Since 2022, the Bank of England raised interest rates, leading to substantial gains for savers. Although current rates have eased to 3.75%, they remain well above pre-pandemic levels. At the same time, tax thresholds have not kept pace with inflation, pushing more people into higher tax brackets. Fiscal drag, the phenomenon where rising incomes push individuals across tax thresholds without corresponding adjustments, has played a key role in this trend. With wages, pensions, and other forms of income increasing, more people are now crossing into higher tax bands. Sarah Coles, head of personal finance at AJ Bell, noted that retirees, who often hold larger amounts of cash, are especially affected. Many retirees have built up emergency savings, and some have used their tax-free pension lump sums to fund savings accounts, inadvertently exposing themselves to tax. Research by the Department for Work and Pensions indicates that 37% of people who took their entire tax-free pension lump sum chose to deposit it into savings, a decision that can lead to unintended tax consequences. To mitigate these risks, financial experts recommend using Individual Savings Accounts (ISAs). ISAs allow savers to invest or save up to £20,000 annually without incurring tax on the interest earned. This option provides a safe haven for those looking to grow their savings without the burden of taxation. Tina Hughes, director of savings at Yorkshire Building Society, emphasized that the current system penalizes responsible savers. She called for urgent reforms to the Personal Savings Allowance, arguing that it must evolve to reflect modern financial realities. As the tax year approaches, savers are advised to reassess their strategies. Whether through shifting funds into ISAs or adjusting withdrawal plans, proactive steps can help avoid unexpected tax burdens. The situation underscores the growing disconnect between the financial landscape and the regulatory framework designed to support it. With millions now at risk, the call for policy changes grows louder.