£12,500 in savings can now trigger a tax bill if you earn more than £50,000

• 5.3 million non-ISA savings accounts could now generate enough interest to trigger tax.
• That is more than 11 times the number recorded in January 2018.
• Higher-rate taxpayers can earn only £500 in savings interest before tax applies.

Britons earning more than £50,000 could face an unexpected tax bill on relatively modest savings, as higher interest rates collide with a Personal Savings Allowance that has remained unchanged for years.

Fresh analysis from Yorkshire Building Society suggests 5.3 million non-ISA savings accounts could now generate more than £1,000 in annual interest, potentially putting the interest earned on those accounts into the tax net. That is a sharp increase from about 462,000 accounts in January 2018.

The change is less about people suddenly having far more money in the bank and more about what their savings can earn.

When the Personal Savings Allowance was introduced in April 2016, easy-access savings accounts typically paid interest of 1 per cent or less. A basic-rate taxpayer could therefore have held around £100,000 in a typical account before earning £1,000 in annual interest.

The calculation looks very different now.

With savings rates around 4 per cent, a basic-rate taxpayer could reach the £1,000 interest threshold with roughly £25,000 in savings. For someone paying the higher 40 per cent rate of income tax, the allowance is only £500, meaning around £12,500 at 4 per cent could be enough to reach the threshold.

That does not mean someone with £12,500 automatically receives a tax bill. The tax applies to interest earned above the Personal Savings Allowance, not the savings balance itself.

But it does mean the amount people need to save before their interest becomes taxable has fallen dramatically.

The allowance has stayed put while savings rates moved

The Personal Savings Allowance gives basic-rate taxpayers up to £1,000 of tax-free savings interest each year. Higher-rate taxpayers get £500, while additional-rate taxpayers have no allowance.

The allowance has not increased alongside savings rates.

Yorkshire Building Society's analysis shows just how quickly the number of potentially affected accounts has changed. In January 2022, only about 172,000 accounts were projected to generate more than £1,000 in interest.

By January 2023, that had jumped to 2.5 million.

The latest estimate of 5.3 million is more than 11 times the January 2018 figure.

Yorkshire Building Society savings director Tina Hughes reportedly said the shift reflected the combination of higher interest rates and a frozen allowance, rather than people suddenly becoming wealthy.

There is also evidence that many savers may not fully understand when they become liable.

Research cited by Yorkshire Building Society found that 36 per cent of people had never heard of the Personal Savings Allowance, while only 31 per cent understood how to pay the tax if they exceeded it.

That could become increasingly important as people hold money across several accounts. The Financial Conduct Authority says people typically have between three and five savings products spread across two or three providers, making it harder to work out the total interest earned.

For savers, the key distinction is between ordinary savings accounts and ISAs. Interest earned inside an ISA is generally tax-free, meaning people with larger cash balances may consider using their annual ISA allowance to shelter savings from tax.

The pressure is particularly visible among older savers.

A Freedom of Information request by Paragon to HM Revenue and Customs found that the total tax liability on savings income among people aged 65 and over is forecast to reach £3.34 billion in 2026/27, compared with £795 million four years earlier.

People aged 65 and over are expected to make up 47 per cent of all taxpayers with an Income Tax liability on savings income in 2026/27, compared with 42 per cent in 2022/23.

The issue is therefore no longer confined to wealthy households with huge investment portfolios.

With a typical median house deposit now around £36,500, someone saving for a home can hold a substantial amount of cash without considering themselves particularly wealthy. At current interest rates, however, the return generated by that money can be enough to create a tax liability.

Moneyfactscompare.co.uk finance expert Rachel Springall reportedly said higher savings rates were leaving more people exposed to what is known as fiscal drag, where tax thresholds remain frozen while incomes, prices or returns rise.

For savers, that leaves a rather unusual situation: the more successful they are at earning interest on money they have put aside, the more likely they may be to attract the taxman's attention.