Millions of UK Savers Hit by Hidden Tax Squeeze
It turns out millions of people in the UK are about to feel a tax pinch they probably weren’t expecting — and it’s all to do with the interest on their savings. New figures from HMRC show that in 2025, over 3.35 million people will end up paying tax on the interest their savings generate. That’s up sharply from just over three million in 2021. The reason? More and more savers are being pushed over their tax-free savings allowance, meaning the interest they earn is now taxable.
This is being driven largely by something called “fiscal drag.” It happens when tax thresholds stay frozen, but wages or interest rates rise — so even if your real income hasn’t grown much, more of it gets taxed. Back in 2022, then-Chancellor Jeremy Hunt froze income tax thresholds until 2028. That decision is still in place, and Prime Minister Sir Keir Starmer hasn’t ruled out keeping the freeze going. It’s sometimes called a “stealth tax” because no rates are being raised, but people still end up paying more.
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By the 2025–26 tax year, nearly 40 million people in the UK are expected to be paying income tax, up from 34.5 million just a few years earlier. According to the Office for Budget Responsibility, that’s going to generate more than £330 billion for the Treasury.
Not everyone is happy about this hidden rise in taxation. Harriet Guevara, chief savings officer at Nottingham Building Society, said the figures show a growing and “often hidden tax burden” on ordinary savers. She pointed out that at a time when families are trying to build a safety net — with the cost of living still high — the government should be protecting savers, not squeezing them.
One flashpoint in this debate is the government’s proposed reforms to cash ISAs. Currently, people can save up to £20,000 a year in a cash ISA without paying tax on the interest. The Treasury was reportedly considering cutting that allowance to encourage more investment in stocks and shares instead — but that plan has been put on hold after pushback from banks and building societies. Critics, including the Building Society Association, warn that reducing the ISA limit could make it harder and more expensive for households and businesses to get loans, potentially harming Labour’s wider economic and housing goals.
For now, the combination of frozen tax thresholds and rising savings interest means that more people — even those on modest incomes — will be caught in the tax net. And unless something changes soon, that “hidden” tax burden is only going to grow.
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