Rising interest rates and frozen tax thresholds mean millions of savers could get a nasty shock. For the first time, many risk breaching the Personal Savings Allowance (PSA) and paying tax on their hard-earned savings.

PSA Limits Slashed by Soaring Interest Rates

The PSA lets basic-rate taxpayers earn up to £1,000 in savings interest tax-free annually. Higher-rate taxpayers get £500, while additional-rate payers get nothing.

When rates were near zero, these limits seemed generous. A basic-rate earner could stash over £150,000 in a top easy-access account without paying a penny tax. Not anymore.

Now, with rates around 5%, keeping more than just £19,600 in savings means hitting the tax threshold. For higher-rate taxpayers, the limit is a stingy £9,800.

Taxman Sets To Cash In Big Time

• 2.64 million people will pay savings tax by 2025/26 – up from just 647,000 in 2021/22
• One in 25 basic-rate taxpayers and one in 8 higher-rate taxpayers affected
• The Treasury expects to rake in over £6 billion this year – a fourfold rise in five years

Are You at Risk? Here’s Your Tax-Free Savings Limit

• Basic-rate (20%) taxpayer: £1,000 tax-free interest. Savings above £19,600 at 5% interest trigger tax
• Higher-rate (40%) taxpayer: £500 tax-free interest. Savings over £9,800 are taxable at 5%
• Additional-rate (45%) taxpayer: No allowance – all interest is taxed

Warning: Self-Assessment Deadline Looms

Kevin Mounford, personal finance expert and co-founder of Raisin UK, warns:

“The 5th October registration deadline is crucial for anyone needing to file a self-assessment return. Miss it and HMRC hits you with automatic penalties – fines start at £100 and can stack up quickly.

“Higher savings rates have flipped the script. You no longer need a six-figure nest egg to pay tax. Many basic-rate taxpayers with less than £20,000 in good accounts are now on the hook. For higher-rate taxpayers, it’s closer to £10,000.

“Lots of people won’t realise they need to register until HMRC cracks down. That can mean nasty surprises – lower pay or reduced pension payments after a tax code adjustment. Register before 5 October to get organised, claim reliefs, and dodge financial headaches.

“This isn’t just for the rich anymore. Everyday families risk losing part of their savings to tax. Using ISAs and reviewing savings plans is more important than ever.”