More than 14 million people in the UK are thought to have over £10,000 saved in cash.
The latest HM Revenue and Customs (HMRC) figures show that more than 1.1 million people over State Pension age are facing a tax bill for interest earned on their savings accounts. Data obtained by investment platform AJ Bell shows that 1,160,000 pensioners are expected to incur an income tax liability on their savings income for the current financial year – 2025/26.
The total has jumped from 493,000 in 2022/23, to 953,000 in 2023/24, and 1,090,000 in 2024/25. AJ Bell said those over State Pension age account for nearly half (44%) of the 2,640,000 taxpayers expected to pay income tax on cash savings interest earned in the current financial year.
The platform said it has highlighted concerns about the growth in the number of people paying tax on savings income, amid interest rate rises in recent years as well as frozen tax thresholds.
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This includes the personal savings allowance for interest, which enables basic rate taxpayers to earn up to £1,000 in savings interest tax-free, while higher rate taxpayers have an allowance of £500.
Savers can keep money in ISAs to ringfence it from the taxman.
There has been recent speculation that the annual allowance for putting money into cash ISAs could possibly be reduced, as part of moves to encourage people to invest.
More than 14 million people in the UK are thought to have over £10,000 saved in cash, and the Government believes some of this could be invested in the stock market to improve people’s financial health.
It is understood that several potential options are on the table and no decisions have been made.
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.”
State Pension and tax
Guidance on GOV.UK states: “You pay tax if your total annual income adds up to more than your Personal Allowance. Find out about your Personal Allowance and Income Tax rates.
Your total income could include:
- the State Pension you get – Basic or New State Pension
- Additional State Pension
- a private pension (workplace or personal) – you can take some of this tax-free
- earnings from employment or self-employment
- any taxable benefits you get
- any other income, such as money from investments, property or savings
Check if you have to pay tax on your pension
Before you can check, you will need to know:
- if you have a State Pension or a private pension
- how much State Pension and private pension income you will get this tax year (April 6 to April 5)
- the amount of any other taxable income you’ll get this tax year (for example, from employment or state benefits)
You cannot use this tool if you get:
- any foreign income
- Marriage Allowance
- Blind Person’s Allowance
Use this online tool at GOV.UK to check if you have to pay tax on your pension.
The full guide to tax when you get a pension can be found on GOV.UK here.