Common savings mistakes could cost UK savers as more face tax on interest

More UK savers are set to face tax on the interest they earn while lower Bank of England base rates are pushing down returns, and experts say everyday mistakes are adding to the problem.

HM Revenue & Customs expects around 2.64 million people to pay tax on interest from savings in 2025–26, according to reporting by This is Money. Financial advisers and industry analysts told the outlet that routine oversights — such as failing to move money when a bonus rate ends, not using Individual Savings Accounts (Isas), and leaving cash in current accounts — are costing savers both interest and tax-efficiency.

Short-term bonus rates and fixed-term deals often revert to much lower variable rates at maturity, eroding returns if savers do not act. Cahoot’s simple saver, for example, is quoted at 4.40% including a 12-month bonus of 3.41%, but the rate falls to about 0.99% once the bonus expires. Tesco Bank’s internet saver includes a bonus that brings the headline to 4.10% but drops to roughly 1.05% after 12 months. Cynergy Bank’s one-year fixed-rate Isa is advertised at 4.32% for the term but moves to a variable Isa paying about 1% if money is left in place after maturity.

"Failure to switch lumbers you with a poor savings rate," said Andrew Hagger, founder of independent information website MoneyComms. "Providers bank on savers forgetting when their bonus or fixed-rate account matures."

Tax allowances add another layer of complexity. Savers can shelter interest by using a cash Isa, where interest is tax-free and the annual Isa allowance is £20,000. Outside Isas, savers still have a personal savings allowance (PSA) that lets basic-rate taxpayers earn £1,000 of interest tax-free and higher-rate taxpayers £500. Low earners who have unused personal allowance may also be eligible for the £5,000 starting rate for savings, which can protect some or all savings interest from tax.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said rising savings rates and frozen income tax thresholds are pushing more people over PSA limits. "Even if you’re not facing a tax bill today, it’s worth considering what will happen as you build your savings. Some people will want to get ahead of a tax bill and make the switch to a cash Isa sooner rather than later," she said.

The interaction of salary, savings interest and tax bands means that pay rises or other income can reduce or eliminate tax-free allowances for interest. The combination of higher headline savings rates and unchanged tax thresholds means sums that would not have triggered a tax bill in 2021 can do so in 2025.

Many savers also forgo simple opportunities to manage tax liabilities. If a spouse or civil partner earns little or no income, some of the unused personal allowance can be transferred to reduce the couple’s tax bill, subject to existing transfer rules. Experts recommend checking eligibility and using Isas where appropriate to shelter interest.

Large pools of idle cash are compounding the problem. More than half of savers still keep some money in current accounts, and an estimated £526 billion is sitting in current accounts earning little or no interest, data cited by Paragon Bank shows. That inaction could cost savers about £20 billion a year in foregone interest, the data suggest. Using current market rates, keeping £5,000 in a best easy-access account paying about 4.3% would earn roughly £215 a year, while the average current account balance of £2,067 would earn about £89 in the same account.

"Keeping your savings in your bank current account is rarely a good idea," Hagger said. He noted that current accounts often pay a pittance, and having savings mingled with everyday money makes balances harder to track and easier to dip into.

Industry specialists advise savers to set calendar reminders for bonus expiry and fixed-term maturities, to review whether funds should be moved into cash Isas, and to check whether personal or starting-rate allowances apply. While the Bank of England’s base-rate movements influence the interest paid by most providers, individual account terms and tax status will determine actual take-home returns.

As headline rates shift and tax thresholds remain unchanged, the combined effect on interest received and tax paid will vary by household. Financial advisers and consumer-information sites recommend regular reviews of savings arrangements to avoid automatic transfers into low-rate accounts and to make the most of available tax reliefs.