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Millions of savers hit by fiscal drag will pay tax on their savings

ended 31. March 2026

Millions of savers will be hit by fiscal drag will pay tax on their savings if they sit outside of an ISA wrapper, according to Moneyfactscompare.co.uk.

The Personal Savings Allowance (PSA) marks its 10-year anniversary on 6 April 2026. However, despite changing interest rates and fiscal drag, it has never been amended.

Savers now receiving interest from the top one-year bond a year ago that paid 4.58% on a £20,000 deposit would have earned £916, breaching the £500 PSA for higher-rate taxpayers, and very close to the £1,000 PSA for basic-rate taxpayers.

A £20,000 investment in the top one-year ISA that paid 4.45% would have earned £890, completely tax-free. 

A survey conducted by Yorkshire Building Society revealed over a third of consumers have never heard of the PSA, and in the past decade, basic-rate taxpayers have paid over £4.7bn in tax on their savings interest.

  • What is your reaction to the figures?
  • Should the Personal Savings Allowance be adjusted?
  • Do many unknowingly have to start paying tax on their savings?

Responses asap this morning.

5 responses from the Newspage community

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Editor
Anita Wright
Chartered Financial Planner at Ribble Wealth Management
The Personal Savings Allowance has not kept pace with reality. It may once have offered modest protection for cash savers, but with interest rates rising and the allowance left frozen, ever more people are being drawn into taxation simply for trying to preserve purchasing power. This is fiscal drag in plain sight. Many will not recognise that they have crossed the line until HMRC does it for them, which is precisely why careful management of cash deposits and full use of ISA shelters has become increasingly important.
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Graham Nicoll
Financial Planner, Chartered FCSI at NCL Wealth Partners
Firstly we need improved financial education for children and consumers more generally, to make them aware of the benefits of saving / investing in ISAs and pensions to close the knowledge gap.

The figures are unsurprising as this is a predictable tax grab by stealth as ordinary savers, not just the wealthy, are unknowingly being pulled into paying tax on cash left in the bank.

The Personal Savings Allowance has not been increase since 2016 so should be uprated, if not linked to inflation going forwards.
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Ross Lacey
Director & Independent Financial Adviser at Fairview Financial Management
This is especially painful for higher and additional rate taxpayers where nearly half the headline interest rate is paid in tax. This can make strategies like using Premium Bonds or potentially Gilts more attractive where cash is being saved.

It's important to consider how much cash, is too much. If saving over a longer period then cash will rarely outpace inflation so buying power is being lost year after year. This is where investing, mainly across company shares, can give a fighting chance of keeping your buying power.

This should be done within the context of a proper financial plan, which allows for known expenditure and how to play things during periods where stock markets dip.
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Rob Mansfield
Independent Financial Advisor at Rootes Wealth Management
The tax net is getting tighter so it makes sense to see if there are ways you can legitimately reduce your tax. Premium Bonds and ISA's are a great way of doing it but you should also consider whether cash is the best home for your savings or whether you should consider a Stocks and Shares ISA. If you have time on your side, being able to invest in shares and bonds without worrying about tax can be a game changer.
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Samuel Mather-Holgate
Managing Director & IFA at Mather and Murray Financial
Its more important than ever for savers to make use of their ISA allowances, with the savings allowance having been cut in half and interest rates higher than they've been for the last 15 years. Most people don't even know that savings interest is now paid gross, and will be surprised they need to complete a tax return if making substancial sums.