Millions of savers are facing a tax bill on their interest this year as higher rates collide with frozen income tax thresholds.

New HMRC figures obtained under the Freedom of Information (FOI) Act show 4.51 million people are forecast to owe income tax on savings income in 2026/27 – almost four times the 1.22 million recorded in 2022/23.

Pensioners are amongst those particularly exposed, with 2.1 million people aged 65 and over expected to pay tax on their savings.

Here, we explain why the number has risen so sharply, who is most affected and what you can do to reduce your bill.

How many people are due to pay tax on their savings?

The number of people paying tax on savings income has soared from 1.22 million in 2022/23 to 4.46 million in 2025/26 and is set to rise again to 4.51 million this tax year.

That is an increase of almost 270 per cent in just four years, according to the data supplied in response to the FOI request, sent by Paragon Bank.

Higher-rate taxpayers – those earning between £50,270 and £125,140 – account for 1.52 million of those expected to pay tax on savings, while 682,000 are additional-rate taxpayers – those earning over £125,140. Basic-rate taxpayers – earning between £12,570 and £50,270 – make up the biggest group at 2.05 million.

In the UK, excluding Scotland, basic-rate taxpayers pay a 20 per cent income tax rate, , and on their earned income.

Those paying the basic rate can make £1,000 in savings interest before paying tax and those on the higher rate £500. Those on the additional rate have no tax-free savings allowance.

Pensioners are particularly exposed. Some 2.1 million people aged 65 and over are set to have a tax liability on savings income this year, compared with 517,000 in 2022/23.

Why are more people owing tax?

There are two big forces at work which mean more people are owing tax on savings interest – higher savings rates and frozen tax allowances.

Savings rates rose sharply as the Bank of England increased interest rates from 2022 onwards, meaning people could earn considerably more from the same pot of cash. Even though rates have subsequently fallen from their peak – now sitting at 3.75 per cent – savers can still earn substantially more interest than they could when rates were close to zero.

At the same time, tax thresholds – the amount you can earn before paying each rate of tax – have been frozen since 2022.

This is known as fiscal drag, as wages, pensions and other income rise over time, more people are pushed across tax thresholds even though the thresholds themselves have not increased.

Sarah Coles, head of personal finance at AJ Bell, pointed out that the reason so many retirees are affected is that retirees also tend to hold more cash. The amount people hold as emergency savings tends to ramp up significantly on retirement.

She explained: “People will also often want to de-risk some of their investments and those with a good handle on their spending needs might look to build a cash flow ladder, or funnel, to match what they’ve got planned for the next few years. This can be enough to tip them into paying tax on some of the interest.”

There’s a risk that in recent years people have been withdrawing tax-free cash from their pension far earlier than they need to, because speculation surrounding the Budget has panicked them into thinking the Chancellor could cut the amount they can take in future.

Research by the Department of Work and Pensions (DWP) shows that amongst people taking all their tax-free cash from a pension, the most common place to put the money was in savings, which 37 per cent of people did. This not only dramatically reduces potential growth but can also expose them to tax, Coles said.

What can you do?

Using an ISA – a tax-free savings or investments wrapper – is the simplest way to protect interest from tax, experts said.

The annual ISA allowance is £20,000 in 2026/27 and interest earned inside an ISA is tax-free. From April 2027, the cash ISA limit for under-65s will fall to £12,000, although the overall ISA allowance will remain £20,000 and people aged 65 and over will retain a £20,000 cash ISA limit.

For savers outside an ISA, the key is to work out how much interest you can earn before tax becomes due.

If you are a higher-rate taxpaying pensioner and have £30,000 in cash savings, paying 4.55 per cent, after a year you could earn £1,394 in interest and pay £357.60 in tax, according to Coles. If you are a basic-rate taxpaying pensioner, you would still have a tax bill for £78.80.

Coles added: “Next April this will get even more painful because the rate on savings interest will rise two percentage points. At that point, the higher-rate taxpaying pensioner would pay £375.48 and the basic rate taxpayer £86.68.”

Another option is premium bonds, Jason Hollands, managing director at Evelyn Partners, said, where you can invest up to £50,000, and pay no tax on the prizes you receive.

If you are a pensioner and have already accessed your pensions tax-free cash, think carefully about the right home for it.

Unless you need it for emergency savings or planned spending over the next five years, you should think about investing at least some of it in a stocks and shares ISA to give it a better chance of beating inflation over the years.

If this cash is your emergency savings safety net, take advantage of your cash ISA to protect it from the taxman.