Millions could pay tax on their savings due to “outdated” Personal Savings Allowance

As the threat of being taxed on their savings interest becomes a reality for many, the tax-free perks of cash ISAs have proved to be invaluable.

The Personal Savings Allowance (PSA) was introduced in April 2016 to protect more savers from paying tax on the interest they earn on their savings.

However, while the PSA allows you to earn up to a certain amount in interest without paying any income tax, millions of savers could face a tax bill because the allowances haven’t changed since its launch.

What is the Personal Savings Allowance?

The PSA allows basic-rate taxpayers to earn up to £1,000 in interest on their savings per year without paying income tax.

Higher-rate taxpayers have a smaller allowance of £500 while additional-rate taxpayers don’t have a PSA. Learn more in our guide to the Personal Savings Allowance.

“April marks the 10-year anniversary of the PSA, and while it protected savings interest from tax when it was launched for many, it’s outdated and needs to change,” Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, commented.

Basic-rate taxpayers alone will have paid around £4.7 billion in tax on their savings interest since the PSA was introduced, according to analysis of HMRC data by Yorkshire Building Society.

The fact that millions of ordinary people risk paying a tax bill on their savings “shows how the PSA has not moved along with the times”, Springall explained.

Why are more savers being taxed?

Since the PSA was introduced in 2016, wages have increased while income tax thresholds have remained the same. This means more individuals have been pulled into higher income tax bands (known as fiscal drag), which in turn means their PSA is cut.

Underlining the impact that freezing the income tax thresholds has had, the number of higher-rate taxpayers increased from around 4.4 million in 2016 to seven million in 2025/26, while the number of additional-rate taxpayers rose from 0.4 million to 1.23 million over the same period.

Moreover, because savings interest rates are significantly higher than in 2016, savers don’ t need to have as much money in their accounts to breach their PSA.

For example, a higher-rate taxpayer in 2016 could have saved up £50,000 in a one-year fixed account paying a typical rate of 1% before breaching their PSA. By contrast, if they deposited just £12,000 into the current market-leading one-year bond paying 4.50% AER, they would earn £540 in interest and be liable to pay tax.

Using ISAs to avoid paying tax

With millions at risk of earning more than the PSA, “cash ISAs have proven their worth to savers over many years”, Springall noted.

Savers can deposit up to £20,000 in cash ISAs each tax-year and, unlike standard savings accounts, the interest earned is completely exempt from income tax.

Springall points out that, particularly around the end of the tax-year, “cash ISAs don’t tend to pay rates too dissimilar to non-ISAs” as providers compete to offer attractive returns to those wanting to take advantage of their annual allowance (a period known as ISA season).

“So really, someone who has or is about to move up an income tax band would be wise to use up their cash ISA allowance, or lose it, as it resets on 6 April,” she urged.

Even those not immediately at risk of paying tax on their savings interest could benefit from putting money in an ISA, as this will protect it from any potential tax liabilities in the future.

It’s worth noting that, from the 2027/28 tax-year, savers aged under 65 will only be able to deposit up to £12,000 into cash ISAs each year (the allowance will remain at £20,000 for those aged 65 and over). As a result, those savers who will be affected by these changes may want to make the most of their current £20,000 ISA allowance while they still can, especially if they’re at risk of breaching their PSA.