The number of UK pensioners paying tax on savings interest is set to rise sharply, with more than 2.1 million people aged 65 and over expected to face a tax bill 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), the number of older savers affected has increased dramatically from around 517,000 in 2022/23. The change reflects a combination of higher savings interest earnings and tax thresholds that have remained unchanged for several years.
Paragon estimates that pensioners could collectively pay around £3.34 billion in tax on savings income during 2026/27, compared with approximately £795 million just four years ago.
Why Are More Pensioners Paying Tax?
The tax applies to interest earned on savings when it exceeds the tax-free allowances available to an individual. Importantly, people are not taxed on their savings balance itself—only on the interest generated.
For the 2026/27 tax year, the Personal Allowance remains at £12,570. In addition, most basic-rate taxpayers can earn up to £1,000 in savings interest tax-free through the Personal Savings Allowance, while higher-rate taxpayers receive a £500 allowance. Additional-rate taxpayers do not qualify for this allowance.
Because these thresholds have remained frozen while many savings accounts continue to generate higher interest income, more pensioners are finding themselves liable for tax.
Frozen Tax Thresholds Create Challenges
The Personal Allowance has stayed at £12,570, while the basic-rate tax band remains set at £37,700 through the 2027/28 tax year.
As a result, retirees who previously stayed within tax-free limits may now exceed them simply because their savings are earning more interest. The impact varies depending on an individual's total income, savings interest, and eligibility for available tax reliefs.
Some lower-income savers may still benefit from the Starting Rate for Savings, which can allow eligible individuals to earn up to £5,000 in savings interest at a 0% tax rate.
How Savers Can Reduce Their Tax Exposure
One option available to savers is using Individual Savings Accounts (ISAs), where interest earned is generally free from income tax under current rules.
The annual ISA allowance currently stands at £20,000. However, from April 2027, a new £12,000 annual Cash ISA limit will apply to individuals under 65, while those aged 65 and over will continue to benefit from a £20,000 Cash ISA cash allowance.
Financial experts encourage pensioners to regularly review their savings income, understand which allowances apply to them, and make use of tax-efficient savings options where appropriate.
Staying Informed
The increase in pensioners facing tax on savings interest does not mean every retiree with savings will receive a tax bill. Individual circumstances vary significantly based on income levels and interest earned.
HMRC provides online tools and guidance to help savers understand their potential tax obligations and determine whether they may owe tax on savings interest.
As interest rates continue to influence savings returns and tax thresholds remain unchanged, many pensioners may need to pay closer attention to how their savings income affects their overall tax position.
FAQs
1. Why are more pensioners paying tax on savings interest?
Higher savings interest earnings combined with frozen tax thresholds mean more retirees are exceeding their available tax-free allowances.
2. Do pensioners pay tax on their savings balance?
No. Tax is only charged on the interest earned from savings, not on the money saved.
3. What is the Personal Savings Allowance?
Basic-rate taxpayers can usually earn up to £1,000 in savings interest tax-free each year, while higher-rate taxpayers receive a £500 allowance.
4. Can ISAs help avoid tax on savings interest?
Yes. Interest earned within an ISA is generally tax-free under current UK tax rules.
5. Will every pensioner with savings have to pay tax?
No. Tax liability depends on factors such as total income, savings interest earned, and eligibility for available allowances.
.webp)
