Millions of savers hit by fiscal drag will pay tax on their savings if they sit outside of an ISA wrapper, according to Moneyfactscompare.co.uk.
- The Personal Savings Allowance (PSA) marks its 10-year anniversary on 6 April 2026. However, despite changing interest rates and fiscal drag, it has never been amended.
- Savers now receiving interest from the top one-year bond a year ago that paid 4.58% on a £20,000 deposit would have earned £916, breaching the £500 PSA for higher-rate taxpayers, and very close to the £1,000 PSA for basic-rate taxpayers.
- A £20,000 investment in the top one-year ISA that paid 4.45% would have earned £890, completely tax-free.
- A survey conducted by Yorkshire Building Society revealed over a third of consumers have never heard of the PSA, and in the past decade, basic-rate taxpayers have paid over £4.7bn in tax on their savings interest.
Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, said:
“Cash ISAs have proven their worth to savers over many years, especially as fiscal drag causes millions to breach their Personal Savings Allowance (PSA). April marks the 10-year anniversary of the PSA, and while it protected savings interest from tax when it was launched for many, it’s outdated and needs to change. Interest rates are higher than back then, and more savers are expected to see their savings income taxed in the years ahead due to fiscal drag. Those basic-rate taxpayers dragged into the higher-rate tax band at 40% will see their PSA halved, to £500. This means even someone building a house deposit will pay tax on a standard savings account, but not if it is held in an ISA.
“Savers who locked £20,000 into the top one-year fixed bond of 4.58% back in March 2025 would receive annual interest of around £916. This return in savings interest is shielded from tax due to the PSA for a basic-rate taxpayer, but only £500 is safe for higher-rate taxpayers. Cash ISAs don’t tend to pay rates too dissimilar to non-ISAs at this time of year, because of the big push to improve deals during ISA season. So really, someone who has or is about to move up an income tax band would be wise to use up their cash ISA allowance, or lose it, as it resets on 6 April.
“The past 10 years have shown consumers the importance of building a healthy nest egg to help brave economic storms, it helps with financial resilience and to mitigate the reliance on short-term debt. The households’ savings ratio was 10.2% during Q2 2025, but dialling back a decade it was much less, at 6.8% during Q2 2016, according to the Office for National Statistics (ONS). Those extra savings need to be put into the right place, so it is wise to seek advice to make sure any interest earned from pots is as tax-efficient as possible. Unfortunately, over a third (36%) of people have never heard of the PSA according to a survey conducted by Yorkshire Building Society, and over the past decade, basic-rate taxpayers have paid over £4.7bn in tax on savings interest since the PSA was introduced. This shows how the PSA has not moved along with the times.”
