More than a million state pensioners are being hit with HMRC tax bills for interest they earned on their savings accounts.
Figures by investment platform AJ Bell show that 1,160,000 state pensioners are expected to pay Income Tax to HMRC on their savings for this current financial year, 2025-26. The firm said that nearly half of the 2.64M taxpayers paying tax on savings interest will be state pensioners.
AJ Bell says it highlight concerns over the increasing number of people hit with tax bills for savings as interest rates rise and Income Tax thresholds remain frozen in place.
Currently, the Personal Savings Allowance gives savers who earn less than £50,270 a tax-free £1,000 they can earn in interest, before they have to pay 20% tax on every £1 earned above that threshold.
But those earning £50,270 or more can only earn £500 savings interest, and these tax bands have been frozen for years and will remain frozen until 2028 at the earliest.
Savers can instead use a Cash ISA to shield money from tax, but speculation has ramped up that the government is about to slash the limit on Cash ISAs from £20,000 down to just £10,000.
Charlene Young, senior pensions and savings expert at AJ Bell, said: “Most people have a personal savings allowance – £500 or £1,000 for higher and basic rate taxpayers respectively – which offers some protection from the taxman’s clutches. Likewise, Isas and pensions are the perfect way to shield your savings and investments and maximise your returns.”
She added: “In retirement it is common to hold a little more cash. People 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.
“With an immediate need to take income from assets, it is natural to focus a little more on capital preservation, meaning cash becomes an increasingly useful tool, despite the risks from inflation over the long term.
“Unfortunately, that appears to be leading to a large number of pensioners suffering a tax bill on their cash savings, with increasing numbers being dragged into higher tax bands too.”
To help avoid unnecessary tax bills on savings, Ms Young suggested not taking money from a pension “unless you need it”.
She said: “You’ll pay income tax on withdrawals above your tax-free cash allowance and, once it’s outside a pension, you may be subject to capital gains or dividend tax if you invest it elsewhere. If you park the money in cash you may find yourself with an added income tax bill – joining more than one million pensioners with a tax liability on cash savings.
“Second, if you want to hold cash as part of your investment strategy, you can do so within a pension. You don’t have to hold the money in the bank.
“Your provider may offer a relatively attractive rate of interest on cash held in a pension, or you could hold investment products that are comparable to cash, such as money market funds.
“You could also think about using an Isa to shelter up to £20,000 a year. Some savers have been paying into regular savings accounts chasing a fractionally higher return in recent years, but that may have backfired for those who find the tax bill now outweighs any additional interest earned and regret not paying into an Isa sooner.”