Savers stung for £28bn as a decade old tax rule leaves millions paying more

Yorkshire Building Society warns millions of ordinary savers are being dragged into paying tax on their hard-earned interest because the Personal Savings Allowance (PSA) has been frozen since 2016 — despite soaring interest rates and frozen tax thresholds pushing more people into higher tax bands.

New analysis of HMRC data and forecasts outlines the staggering impact of this long-ignored policy: by the end of the 2025-26 tax year, taxpayers will have paid over £28bn in tax on their interest since the PSA was introduced, with £4.7 billion paid at the basic rate [1].

The PSA remains frozen at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, while additional rate taxpayers still have no allowance at all. Yet during the same period, the Bank of England base rate has rocketed from 0.50% to 3.75%, instantly pushing ordinary savers over their allowances. 

When the PSA was introduced on 6 April 2016, the majority of easy access accounts paid 1% or less, now the majority pay 3% or less. This means that in 2016 basic-rate-tax payers would have been able to put away a whopping £100,000 in a typical savings account. In 2026, with interest rates hovering around 3%, savers would only be able to save around £33,000 without breaching their allowance. For those earning over £50,271 and paying higher-rate tax, that amount would fall to around £16,000.

At the same time the cost of living has increased, and people need bigger nest-eggs to be able to reach ordinary milestones. The median average house deposit has increased from £25,000 in 2016 to £36,500 in 2024-5 – an increase of 46% in almost 10 years [2].

Worryingly, knowledge of the PSA is low. Yorkshire Building Society research suggests that only 51% of people can correctly identify what it stands for. Over a third (36%) have never heard of it — and even among those who claim to understand it, over half (52%) do not know the limits [3]. If they exceeded their allowance, just 31% would know how to pay the tax. One in five (20%) would have no idea what to do [3]. 

From 2027, the Cash ISA allowance will drop from £20,000 to £12,000 for those under 65 — leaving savers with even fewer tax-free options. Combined with a PSA frozen for a decade, the pressures on anyone trying to save responsibly are escalating fast. 

Fiscal drag is tightening the grip. Frozen income tax thresholds mean more people are being pushed into higher rate tax bands without their real incomes rising — instantly halving their PSA. Since 2016, the number of higher-rate taxpayers has increased by 2.1 million, and by 2030 the OBR expects that 4.4 million taxpayers will be pulled into the higher-rate tax band because of fiscal drag. [4]

Tina Hughes, Director of Savings at Yorkshire Building Society, said: “Ordinary people are being penalised by a system that simply hasn’t kept pace with reality. These aren’t wealthy investors — they’re people putting money aside for a house deposit, families saving for their children, or those planning a well-earned holiday.

“When the PSA was introduced, almost no one breached it. Today, millions do — not because they’re rich, but because the allowance is frozen and thresholds haven’t moved. People doing the right thing are facing rising tax bills and fewer ways to protect their savings. It’s time for a modern, fair framework that gives savers clarity and confidence.” 

Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, said: “It is clear as day to see why the PSA has not moved along with the times. Changes to interest rates and the fiscal drag has led to millions of savers breaching their allowance. 

“One of the best ways to shield savings returns from tax would be to use an ISA, but those without good guidance can overlook them. Time is running out for savers to take advantage of the 2025-26 ISA allowance; they need to use it or lose it.

“Earning a decent return of interest can help boost nest eggs, which could be a huge difference to consumers suffering from an increase in the cost of living. Regularly checking rates and looking beyond the biggest high street banks is wise, because loyalty does not pay.” 

Calling Time on a Broken System
Yorkshire Building Society is urging savers to make full use of their ISA allowances while they remain at current levels — and calling on the Government to overhaul the outdated PSA.

The Society’s Frozen in Time campaign calls for:

• A modernised PSA that reflects today’s interest rate environment
• Clear, stable ISA rules so savers can plan with certainty
• Simple, accessible guidance to help people understand their allowances and avoid unnecessary tax bills 

References 
1.    Analysis of HMRC Income tax liability statistics 2016-2026
2.    Survey of 2,000 UK adults, weighted to be nationally representative, undertaken by Opinium 5th-12th November 2025.  
3.    Housing Survey Headline Report, 2016-17 and 2024-25 
4.    Office for Budget Responsibility. Economic and fiscal outlook. November 2025