Yorkshire Building Society issues tax warning as millions at risk from HMRC's raid on savers

The number of savings accounts generating more than £1,000 in annual interest has risen by 1,047 per cent since 2018, new research has found.

Yorkshire Building Society’s analysis of CACI data projects that 5.3 million non‑ISA savings accounts will generate more than £1,000 in annual interest by January 2026, compared with just 462,000 eight years earlier.

The surge has been linked to the personal savings allowance remaining unchanged since its introduction in 2016.

As savings rates have increased while thresholds have stayed frozen, more savers have been brought into the scope of tax on their interest.

Yorkshire Building Society found many affected people may not realise they could face a tax liability.

The personal savings allowance lets basic‑rate taxpayers earn up to £1,000 in savings interest tax‑free.

Higher‑rate taxpayers receive a £500 allowance, while additional‑rate taxpayers receive none. The thresholds have not changed for a decade.

At a savings rate of four per cent, a basic‑rate taxpayer would need £25,000 saved to generate £1,000 in annual interest.

A higher‑rate taxpayer would reach their £500 allowance with £12,500 saved. Rising rates and frozen thresholds mean people with relatively modest balances can now exceed their allowance.

The impact is particularly relevant for first‑time buyers. Yorkshire Building Society estimates a 15 per cent deposit on an average first‑time buyer property in England is around £36,663.

At four per cent interest, that deposit would generate roughly £1,467 a year — leaving a basic‑rate taxpayer with £467 above their allowance.

Interest above the allowance can be taxable depending on an individual’s circumstances. The personal savings allowance is separate from ISAs, where interest is generally tax‑free.

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Yorkshire Building Society found 36 per cent of people had never heard of the personal savings allowance, and only 31 per cent understood how tax on savings interest is collected.

For most employees and pensioners, HM Revenue and Customs (HMRC) collects tax due on savings interest by adjusting tax codes.

Banks and building societies report interest to HMRC, allowing it to determine whether someone has exceeded their allowance.

People completing self‑assessment returns must declare their interest, while those who do not file returns will be contacted by HMRC if tax is owed.

The amount of tax due depends on income, tax rate and interest earned above the allowance.

Higher‑rate taxpayers reach the threshold more quickly, and additional‑rate taxpayers pay tax on all savings interest.

The research highlights the growing impact of frozen allowances at a time when households are holding larger cash balances and savings rates are significantly higher than when the allowance was introduced.

Savers with accounts across several providers may need to consider their combined interest when assessing whether they have exceeded the threshold.

GB News has contacted HMRC for comment.