The rising squeeze is compounded by revenue tax thresholds being frozen
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Thousands and thousands are being pulled into paying tax on their nest eggs as frozen allowances and better rates of interest mix to erode protections as soon as meant to protect them.
Specialists warn that so-called “fiscal drag” is quietly dragging extraordinary households into the taxman’s internet, with many now breaching limits which have remained unchanged for a decade. The Private Financial savings Allowance (PSA), launched in April 2016, permits basic-rate taxpayers to earn as much as £1,000 in financial savings curiosity tax-free, whereas higher-rate taxpayers can earn simply £500. Extra-rate taxpayers get no allowance in any respect.
However regardless of a pointy rise in rates of interest over latest years, the thresholds have been left frozen – that means extra savers at the moment are exceeding them.
Evaluation from Moneyfactscompare.co.uk reveals somebody who locked £20,000 right into a high one-year bond paying 4.58% would earn £916 in curiosity over a 12 months. That comfortably breaches the £500 PSA for higher-rate taxpayers and comes near the £1,000 restrict for basic-rate taxpayers.
In contrast, the identical £20,000 positioned in a number one money ISA paying 4.45% would generate £890 fully tax-free.
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The rising squeeze is compounded by revenue tax thresholds being frozen, pushing extra employees into higher-rate bands the place the PSA is lower in half from £1,000 to £500 – a 50% discount.
Rachel Springall, finance skilled at Moneyfactscompare.co.uk, mentioned: “Money ISAs have confirmed their price to savers over a few years, particularly as fiscal drag causes tens of millions to breach their Private Financial savings Allowance (PSA).
“April marks the 10-year anniversary of the PSA, and whereas it protected financial savings curiosity from tax when it was launched for a lot of, it’s outdated and wishes to alter.”
She added: “Rates of interest are larger than again then, and extra savers are anticipated to see their financial savings revenue taxed within the years forward as a result of fiscal drag.
“These basic-rate taxpayers dragged into the higher-rate tax band at 40% will see their PSA halved, to £500. This implies even somebody constructing a home deposit can pay tax on an ordinary financial savings account, however not whether it is held in an ISA.”
The warning comes as many savers stay unaware of the foundations. Analysis by Yorkshire Constructing Society discovered 36% of individuals have by no means heard of the PSA.
Over the previous decade, basic-rate taxpayers alone have paid greater than £4.7bn in tax on their financial savings curiosity, underlining how the allowance has didn’t hold tempo.
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Ms Springall mentioned: “Savers who locked £20,000 into the highest one-year mounted bond of 4.58% again in March 2025 would obtain annual curiosity of round £916.
“This return in financial savings curiosity is shielded from tax because of the PSA for a basic-rate taxpayer, however solely £500 is protected for higher-rate taxpayers.”
She added that with ISA charges now broadly aggressive in the course of the end-of-tax-year rush, many households ought to think about sheltering their financial savings earlier than the deadline.
“Somebody who has or is about to maneuver up an revenue tax band could be sensible to make use of up their money ISA allowance, or lose it, because it resets on 6 April,” she mentioned.
The broader development highlights a shift in family funds, with the UK financial savings ratio rising to 10.2% within the second quarter of 2025, up from 6.8% in the identical interval in 2016, based on official figures.
Ms Springall mentioned: “The previous 10 years have proven shoppers the significance of constructing a wholesome nest egg to assist courageous financial storms… These further financial savings must be put into the best place, so it’s sensible to hunt recommendation to ensure any curiosity earned from pots is as tax-efficient as potential.
“Sadly, over a 3rd (36%) of individuals have by no means heard of the PSA… This reveals how the PSA has not moved together with the occasions.”
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