Millions Face Tax on Savings Interest as UK Pensioners Pay More

Tax on savings interest is affecting more UK pensioners as frozen tax thresholds and rising savings income push millions toward higher tax bills

More than 2.1 million UK pensioners aged 65 and over are expected to face Income Tax on their savings interest in the 2026/27 tax year, according to figures obtained by Paragon Bank through a Freedom of Information request to HM Revenue and Customs (HMRC). That is more than four times the 517,000 older savers estimated to have faced a liability in 2022/23.

The figures show how more retirees are being drawn into the tax system as savings

interest has increased while key tax thresholds remain frozen. Paragon estimates that the total tax bill on savings income for over-65s could reach £3.34 billion in 2026/27, compared with £795 million four years earlier.

Why More Pensioners Are Facing Tax

The tax on savings interest applies to interest earned from savings when it exceeds the allowances available to an individual. The tax is not charged on the savings balance itself.

For the 2026/27 tax year, the Personal Allowance is £12,570. Basic-rate taxpayers can generally receive up to £1,000 in savings interest through the Personal Savings Allowance without paying tax on that interest, while higher-rate taxpayers have a £500 allowance. Additional-rate taxpayers do not receive a Personal Savings Allowance.

HMRC also provides an online service allowing people to check how much tax they may have to pay on savings interest and dividends. Check your savings interest tax with HMRC can help eligible taxpayers understand whether they may have a liability.

Frozen Thresholds Add Pressure

The Personal Allowance has remained at £12,570, while the basic-rate limit is £37,700 for 2026/27 and 2027/28.

As savings rates and interest income change, some retirees can therefore move closer to or beyond their available tax-free allowances without the relevant thresholds increasing at the same pace.

The savings interest tax burden is not the same for every pensioner. Someone's liability depends on their total taxable income, the amount of interest earned and the allowances they qualify for.

Lower-income savers may also benefit from the Starting Rate for Savings, which allows eligible people with sufficiently low non-savings income to receive up to £5,000 of savings income at a 0% rate.

What Savers Can Do

Interest earned inside an ISA is generally tax-free under the current rules. The annual ISA allowance is £20,000, although changes from April 2027 will introduce a £12,000 annual Cash ISA limit for people under 65, while those aged 65 and over will retain the £20,000 Cash ISA cash limit.

The rise in the number of older people facing tax on savings interest does not mean every pensioner with savings will receive an HMRC bill. Savers should consider their total income and interest and check which allowances apply to them.

For those concerned about savings interest tax, HMRC's online guidance can provide a useful starting point for understanding an individual's position.

FAQs

1. Do all pensioners pay tax on savings interest?
No. Whether tax is due depends on total income, savings interest and the allowances available to the individual.

2. How much savings interest can a basic-rate taxpayer receive tax-free?
A basic-rate taxpayer can generally receive up to £1,000 of savings interest under the Personal Savings Allowance.

3. What is the Personal Savings Allowance for higher-rate taxpayers?
Higher-rate taxpayers generally have a £500 Personal Savings Allowance.

4. Can low-income pensioners receive savings interest tax-free?
Some may qualify for the Starting Rate for Savings, which can allow up to £5,000 of savings income to be taxed at 0%, subject to the relevant income conditions.

5. Is interest earned in an ISA taxable?
Interest earned within an ISA is generally tax-free under the current rules.