Pensioners Face £2.5bn Hit from Savings Interest Tax as Frozen Bands Pull More into Higher Rates

Pensioners are set to pay about £2.5 billion in tax on savings interest this financial year as frozen income tax thresholds and an unchanged personal savings allowance push more households into the charge, official figures show.

Data obtained from HM Revenue and Customs under a Freedom of Information request by Paragon Bank — and shared with This is Money — indicate the savings tax burden for people aged over 65 will rise 215% compared with the 2022–23 tax year.

The increase reflects the interaction of two long-standing policy settings. The personal savings allowance (PSA), which specifies how much interest individuals can earn tax-free, has not been altered since it was introduced in 2016. PSA entitlement is tied to a taxpayer's income tax band: basic-rate taxpayers receive £1,000 of tax-free interest, higher-rate taxpayers £500, and additional-rate taxpayers are not eligible for a PSA. Meanwhile, income tax bands have been frozen since 2022, meaning nominal thresholds for basic, higher and additional rates have not risen with inflation.

As incomes are nudged into higher bands by inflation and wage movements while thresholds remain fixed — a process often described as fiscal drag — more people lose PSA entitlement or see it reduced. That reduces the amount of interest that can be earned tax-free and increases receipts from savings interest collected by the Exchequer.

The HMRC figures made public through the FOI request show the cumulative effect is hitting older savers particularly hard. Many pensioners rely on interest from savings as a component of retirement income or as an emergency buffer, and the change has increased the number who will face tax on that income even without an explicit rise in headline rates.

Financial services firms, consumer groups and some commentators have said the outcome amounts to a stealthy source of extra revenue for the Treasury because it raises household tax liabilities without changing published tax rates. Supporters of the policy framework argue that freezing bands is a legitimate fiscal tool that broadens the tax base; critics say it disproportionately affects those on fixed incomes, including retirees.

The PSA was introduced in 2016 and has remained at the same levels since. The combination of unchanged PSA thresholds and frozen income tax bands means savers whose nominal incomes have risen may face a lower tax-free allowance for interest simultaneously as their marginal tax rate increases.

HMRC's FOI response, as disclosed by Paragon Bank, did not provide a breakdown of how many pensioner households will move into higher PAYE bands solely as a result of the freeze. Nor did it specify which interest-bearing accounts or rates are driving the additional receipts. Analysts say a sustained period of higher market interest rates would magnify the effect because more interest income across households becomes taxable, while falls in rates would reduce the immediate impact.

The development comes amid wider debate in the United Kingdom over the use of tax-bracket freezes to raise revenue. Freezing thresholds has been used in recent years as a means to increase receipts without increasing headline rates; the approach increases the number of taxpayers subject to higher marginal rates as nominal incomes rise.

Parliamentary scrutiny of tax policy typically focuses on headline rates and allowances, but fiscal drag can change liabilities for particular groups over time. Pensioner groups and some sector commentators have urged the government to consider targeted measures or adjustments to allowances to protect those on fixed incomes, while others point to the need to balance public finances.

The figures were first reported by This is Money and are based on HMRC information released to Paragon Bank under the Freedom of Information Act. The data underline how interactions between long-standing allowances and tax thresholds can materially alter tax liabilities for retirees even in the absence of formal rate changes.