Savers risk losing out as rates fall and more face tax on interest

Savers who fail to move money at the end of fixed-rate deals, overlook tax allowances or keep cash in low- or no-interest current accounts risk losing substantial interest as the Bank of England base rate falls and more people become liable for tax on savings income.

HM Revenue & Customs estimates that about 2.64 million people will pay tax on interest earned in savings accounts in 2025-26, a marked rise from earlier years. Savings experts told This is Money and other outlets that a series of common mistakes could compound the bite taken from lower headline rates and rising tax exposure.

A frequent error is failing to move money when promotional or fixed rates end. Many banks include short-term bonuses that substantially boost the headline rate for a year, then drop the rate to a much lower variable level. For example, Cahoot’s Simple Saver is advertised at about 4.40 percent but includes a 12-month bonus of 3.41 percentage points; left untouched, the rate can fall to roughly 0.99 percent once the bonus expires. Tesco Bank’s internet saver similarly carries a 4.10 percent headline figure that contains a 3.05 percentage-point bonus, falling to around 1.05 percent after a year.

"Failure to switch lumbers you with a poor savings rate," said Andrew Hagger, founder of MoneyComms. Some fixed-term products will automatically roll money into a lower-yielding variable account when the term ends. Cynergy Bank’s one-year fixed-rate ISA, for example, can revert to a variable-rate ISA of about 1 percent if the customer does not move funds when the fixed term concludes. Sarah Coles, head of personal finance at Hargreaves Lansdown, urged savers to set diary reminders for account expiries to avoid an automatic downgrade.

Tax exposure is also shifting. In addition to the Personal Savings Allowance, which gives basic-rate taxpayers £1,000 and higher-rate taxpayers £500 of interest tax-free, there are other allowances that savers sometimes overlook. Those with little or no other income may use the personal allowance of £12,570 and the £5,000 starting rate for savings to shield interest from tax. That combination can allow someone with no other income to earn around £6,000 in savings interest tax-free in a year when the full allowances apply.

Freezing of income tax thresholds and rising interest rates relative to previous years means more people will cross into higher tax bands or breach savings allowances. Analysts point out that the amounts of cash saved that would trigger the Personal Savings Allowance have dropped sharply since 2021 because headline deposit rates previously were lower. A basic-rate taxpayer would now breach their Personal Savings Allowance with about £19,600 in a top easy-access account, while a higher-rate taxpayer would breach it with about £9,800. In 2021 those thresholds were roughly £154,000 and £77,000 respectively.

ISAs remain the most straightforward shelter for interest. Individual Savings Accounts allow savers to earn interest tax-free on up to £20,000 deposited across ISA products in a tax year. With easy-access cash ISAs offering rates above 5 percent in some cases and one-year fixes around 4.3 percent, experts say using ISA allowances can prevent an emerging tax bill as balances grow.

Many consumers also leave sizeable balances in current accounts instead of higher-yield products. Research cited by Hargreaves Lansdown shows more than half of savers keep some cash in current accounts; an estimated £526 billion sits in current accounts, where it often earns little or no interest. One in three people is reported to have £5,000 in a current account, while the average current account balance is about £2,067. Data from Paragon Bank suggests that savers might be missing out on roughly £20 billion a year in interest by leaving money in current accounts rather than moving it into higher-rate savings accounts.

Using available rates as an example, £5,000 placed in a top easy-access account paying 4.3 percent would generate about £215 in interest over a year, while the average current account balance of £2,067 would produce about £89 in the same account. Industry commentators say keeping savings in a current account also raises the risk of accidental spending and makes tracking goals harder.

Savers mindful of tax and rate changes can take several straightforward steps. Moving funds into an ISA where possible, checking the end dates on fixed-term accounts, setting calendar reminders to review maturing products, and reviewing where larger cash balances are held can reduce the chance of a surprise drop in returns or an unexpected tax bill. Transferring unused personal allowance to a spouse in an eligible situation can also be a planning option for some households.

Banks and building societies typically notify customers before promotional periods end, but providers can rely on inertia: if customers do not act, funds may roll into default, lower-rate accounts. With more people forecast to face tax on savings interest in 2025-26, advisers say proactively reviewing accounts and allowances is increasingly important as a practical matter for managing household finances.

HMRC’s projection that 2.64 million people will pay tax on interest in 2025-26 highlights how tax and rate developments together can alter the net return on cash savings. As headline rates and tax exposure evolve, industry figures and consumer groups say regular reviews of where cash is held and how allowances are used remain central to protecting returns and avoiding avoidable losses of interest.