Martin Lewis, the UK financial expert behind MoneySavingExpert, has highlighted in recent discussions that savers with around £10,000 or more could start facing tax on their interest earnings due to current high interest rates combined with the Personal Savings Allowance (PSA) limits.
This isn’t a new tax rule, but rising rates (often around 5%) mean more people are hitting or exceeding their tax-free thresholds on interest.
The PSA lets basic-rate taxpayers earn up to £1,000 of savings interest tax-free, while higher-rate taxpayers only get £500. Additional-rate taxpayers get no allowance. These thresholds are set out in HMRC guidance: see Tax on savings interest and Income tax bands.
At today’s easy-access rates, best buys sit around 4.7%–4.8% AER—£10,000 earns roughly £470–£480 a year. That keeps most basic-rate savers within the PSA, but pushes higher-rate savers close to or over their £500 cap once balances or rates tick higher.
For a basic-rate taxpayer, you’d usually need roughly £20,000 in top easy-access accounts to breach the £1,000 PSA; for a higher-rate taxpayer, £10,000 at around 5% already produces £500 in interest—right on the line.
If you exceed the allowance, tax is due at your usual income tax rate. HMRC normally adjusts your tax code if you’re employed or on a pension, based on last year’s reported interest. If your total savings and investment income is over £10,000, you must register for Self Assessment and file a return.
Advice from Martin Lewis
To avoid or minimize tax:
- Switch to Cash ISAs: Interest is always tax-free and doesn’t count toward your PSA. You can save up to £20,000 per tax year. Top easy-access Cash ISAs currently pay around 4.76%, with full withdrawal flexibility. Lewis recommends maxing this out first for larger pots.
- Check your rates: Ensure your money is in the highest-paying accounts or ISAs—compare via tools like MoneySavingExpert’s savings guides.
- For most people: Combining PSA and ISAs means you can avoid tax entirely on savings interest with proper planning.
If you’re unsure about your tax band or potential bill, use HMRC’s online calculator or check your self-assessment. This guidance applies to UK residents; rules differ for non-residents.
