Over 1.4m taxpayers ‘unaware’ they’re about to be slapped with £641 bill – 1 way to avoid | Personal Finance | Finance

Brits have been urged to take full advantage of Cash ISAs as millions face an average tax bill of £641 on their savings interest. Figures released through a Freedom of Information (FoI) request suggest that the number of people paying tax on their savings has more than doubled in three years, rising from 1.27million in 2022-23 to 2.79million in 2025-26.

Paragon Bank, which conducted the research, said that basic rate taxpayers, in particular, are being drawn into tax liability. The number paying tax on savings interest has risen from 613,000 in 2022-23 to 1.42 million in 2025-26 – a 132% increase. On average, the bank said savers in that tax band will pay £641 in income tax on their savings.

Andrew Wright, Paragon Bank’s head of savings, said: “More people than ever are being drawn into paying tax on their savings, and a letter from HMRC risks catching many by surprise.

“With the number of taxpayers on savings interest rising so sharply, it’s never been more important for savers to consider using Cash ISAs.”

While the Personal Savings Allowance (PSA) protects most people from paying tax on interest, the threshold has not changed since it was introduced nearly 10 years ago.

Currently, basic-rate taxpayers can earn up to £1,000 in interest tax-free, and higher-rate taxpayers have a £500 allowance. Additional-rate taxpayers receive no exemption and are taxed on all interest earned outside tax-free accounts.

With savings rates still relatively competitive and the PSA frozen, more savers are breaching the tax-free threshold. As a result, their interest is taxed at 20%, 40% or 45% depending on their income band.

Mr Wright said the 132% rise in basic‑rate taxpayers paying tax on savings interest is likely being driven by retirees and those with modest incomes but meaningful savings balances.

The bank’s separate FoI request showed that individuals aged 65 and over are forecast to pay £2.5billion in tax on their savings interest in 2025-26, a 215% increase from 2022-23.

Mr Wright said: “Many pensioners depend on savings interest to support their income, but frozen income tax thresholds and unchanged Personal Savings Allowances are pulling more people into a part of the tax system originally designed for wealthier individuals.

“With tax on savings income due to increase from April 2027, that pressure will only intensify at a time when households are still contending with the effects of inflation.

“More mature savers value the stability of cash and have saved prudently over many years to build financial resilience, so it’s unfair they are being punished through a tax system not initially designed for them.”

Individual Savings Accounts (ISAs) are a tax-efficient savings or investment account available to UK residents.

With more savers building higher balances while interest rates remain relatively high, the ISA wrapper is one of the most effective ways to shield returns from tax.

Mr Wright said: “The tax-free status of ISAs means savers keep every pound of interest they earn, providing certainty and protection at a time when allowances are frozen, and interest rates remain competitive.”

There are four main ISA types – Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, and Innovative Finance ISAs.

Cash ISAs function like a standard savings account, but all interest earned is tax-free.

Stocks and Shares ISAs allow you to invest in shares, funds, or bonds, with all investment growth and income shielded from tax.

Innovative Finance ISAs are riskier, but these accounts let you invest in peer-to-peer lending or crowdfunding platforms, with returns protected from tax.

Finally, Lifetime ISAs are currently designed to help people save for a first home or retirement, with an annual contribution limit and a Government bonus of up to £1,000 per year.

There is a total ISA allowance that runs each tax year, starting from April 6 to April 5, and the maximum you can deposit across all your ISAs is currently £20,000.

You can split this allowance across different types of ISAs, and recent changes mean you can pay into multiple ISAs of the same type in the same tax year, provided you don’t exceed the overall limit.

To open an ISA, you must be at least 18 years old (or 16 for a Cash ISA) and a UK resident for tax purposes.

People aged under 18 can instead launch a Junior ISA, which allows tax-free savings of up to £9,000 per year.

From April 2027, the Cash ISA limit for those under 65 will drop to £12,000, and transfers from Stocks and Shares ISAs to Cash ISAs will no longer be allowed for under-65s.

New eligibility tests will also apply to Stocks and Shares ISA permitted investments, and a charge will be introduced on interest paid on cash held within them.

Chancellor Rachel Reeves announced the changes during her 2025 Autumn Budget, in a move aimed at “driving better returns for savers and incentivising investment.”

For people under the age of 65, Joshua Croft, senior technical consultant at AJ Bell, said: “The lower Cash ISA limit means less tax-free shelter for low-risk savings.

“To maintain the full £20,000 allowance, they will need to consider Stocks and Shares ISAs, investing those funds into markets.”

New research suggests investing beats Cash ISAs three times over in one year. According to Moneyfactscompare, the average Stocks and Shares ISA fund grew by 11.22% over the 12 months to February, marking three consecutive years of positive growth returns.

In contrast, the Moneyfacts average Cash ISA rate returned 3.48% over the same period. The average return is down compared to the previous 12 months.

Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Stocks and Shares ISAs have now outperformed Cash ISA returns for the third consecutive year. This should be a wake-up call for those who fear investing, as cash returns have diminished.

“However, it is important not to rely on returns over the shorter term when making longer-term investment decisions.

“Cash is considered a safe choice, but investing shows the gains that could be made over the long term.

“Granted, past performance is not guaranteed to be repeated, so short-term gains should not be the decision-maker in isolation.

“The past year alone laid bare the importance of seeking advice before taking the plunge to invest – some sectors boom one year and perform badly the next, but can bounce back.”

Regardless, Ms Springall noted that Cash ISAs become an increasingly attractive choice for savers, particularly those moving up from being a basic-rate taxpayer to a higher-rate taxpayer.

She said: “ISAs will be an essential part of any saver’s portfolio to shield returns from tax, but many will need to revisit their Cash ISA plans in the years ahead due to upcoming limit changes.

“The intention of the cut is to drive consumers to invest more, but anyone concerned should seek advice in the first instance to see how this will impact them.”