Around 1.16 million pensioners will pay tax on interest earned from savings, accounting for 44% of all individual tax bills on earnings derived from savings this year. HMRC is due to collect tax from more pensioners who have earned interest on savings because of frozen tax thresholds and higher interest rates. Here we explain why more pensioners will pay tax on savings and how they could minimise their tax bill.
Pensioners paying tax on savings interest
A freedom of information request by the investment company AJ Bell revealed that the number of pensioners liable to pay tax on earnings from savings this year has increased to 1.16 million. Comparatively, the number of pensioners required to do so in the tax year 2022/23 was 493,000.
This significant increase reflects the greater number of people exceeding state pension age whose earnings are higher than the basic rate tax threshold. In fact, pensioners will make up around two-thirds of the overall tax bills on savings, payable at the basic tax rate.
Why are more pensioners paying tax on savings?
The increase in the number of pensioners paying income tax on their cash savings interest is primarily due to a combination of rising interest rates and frozen tax thresholds. With interest rates climbing, the cash savings that many retirees hold are generating significantly more interest, which is pushing them past their tax-free limits.
Crucially, key tax-free allowances have been frozen, making them easier to breach:
- The Personal Allowance, the amount of all income (including pensions) you can earn before paying any Income Tax, is frozen at £12,570 (for 2025/26).
- The Personal Savings Allowance (PSA) for interest has remained static at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers since its introduction.
- The Starting Rate for Savings - a 0% tax band on up to £5,000 of savings interest - is being eroded for many. This allowance reduces pound-for-pound by every £1 your non-savings income (like your pension) exceeds the £12,570 Personal Allowance. You can read more about this in our article, “What is the personal savings allowance (and how you can boost it by £5,000)”.
This situation is particularly affecting pensioners, who commonly hold larger amounts of cash. Since income tax is applied to pensions first, their non-savings income quickly uses up the Personal Allowance and may also eliminate the Starting Rate for Savings, leaving their rising interest earnings exposed to tax at their marginal rate once the low PSA is exceeded. This has resulted in over a million people over state pension age facing an unexpected income tax bill on their cash savings interest.
How to minimise tax on savings
It is important to review your savings arrangements to ensure that these are organised in a tax-efficient manner. Monitoring your earnings from all sources will also prevent you from inadvertently exceeding tax thresholds.
Tax-efficient ways to save
Use your ISA allowance
You can deposit up to £20,000 annually into an Individual Savings Account (ISA) where it can earn interest without attracting any tax - your partner or spouse can do the same. Currently, an easy-access Cash ISA can earn up to 4.51% variable interest while you can earn up to 4.28% as a fixed rate of interest on a 1-year Cash ISA. With both of these examples the interest is paid without being liable for income tax. You can find the best rates regularly updated in our articles, “Best easy access Cash ISAs” and “Best fixed rate Cash ISAs”.
Control your income from other sources (especially from pensions)
Another strategy is to control the level of income you receive from sources other than savings in order to reduce your potential tax bill. Any money held within a pension grows tax free, however, the money you draw from your pension is not only taxable as income but could push you over the tax thresholds when combined with any other earnings. In some cases this is unavoidable, but where possible, you may wish to adjust the amount of money you draw from your pension so that you stay within the key income tax thresholds.
Split your cash savings with your spouse
Consider whether your savings would be better held by you or your partner based on your tax status, and spread them accordingly. If one person’s earnings exceed higher tax thresholds then it may be better for the other person to hold savings in their name to attract less or no tax on the interest earned, making sure to both take advantage of the Personal Allowance, the Personal Savings Allowance and the Starting Rate for Savings where possible.
MTTM AI (beta) 
