For UK savers aged 65 and over, higher interest income is creating an unexpected tax squeeze. More than 2.1 million pensioners are forecast to pay tax on savings interest in 2026/27, compared with 517,000 in 2022/23. The Personal Savings Allowance has not increased alongside higher returns on cash deposits. As a result, retirees who depend on savings income could face a larger tax bill, prompting fresh concerns about a “stealth tax” on retirement savings.
Why are Over-65s Facing a Savings Interest Tax Shock?
The tax burden on older savers has increased as savings rates have risen. Paragon Bank estimates that people aged 65 and over will pay £2.5 billion in tax on savings interest in 2025/26. That is a 215% increase from 2022/23.
Recent HMRC data reported in August 2026 also points to more than 2 million retirees facing tax on savings interest. The estimated bill is around £3.34 billion.
How Have Higher Interest Rates Changed the Tax Equation?
Higher savings rates mean the same amount of money can now generate more interest. For instance, £50,000 earning 5% would produce £2,500 in interest over a year.
That amount is above the Personal Savings Allowance for a basic-rate taxpayer. For higher-rate taxpayers, the tax-free allowance is even lower. This can affect older savers more because many prefer cash deposits for their retirement income and the security they offer.
Why are More Retirees Being Taxed?
The Personal Savings Allowance has been unchanged since 2016. Meanwhile, tax thresholds have remained frozen as savings income has increased.
Paragon’s research shows that the amount of tax paid by retirement-age savers is rising much faster than the wider savings tax burden. Additional-rate taxpayers aged 65 and over are expected to see particularly large increases.
How Much Savings Interest Can Pensioners Earn Tax-Free?
Being over 65 does not provide a separate Personal Savings Allowance. For 2026/27, basic-rate taxpayers can earn up to £1,000 in savings interest without paying tax. The allowance falls to £500 for higher-rate taxpayers, while additional-rate taxpayers have no Personal Savings Allowance.
What About the £12,570 Personal Allowance?
The standard Personal Allowance is £12,570 for 2026/27. The government has also confirmed that it will remain frozen through 2030/31.
Some lower-income savers may qualify for the £5,000 starting rate for savings, depending on how much other income they receive. This can make the final tax calculation less straightforward.
Why are Frozen Tax Thresholds Creating a Stealth Tax?
Fiscal drag is adding to the pressure. When tax thresholds stay at the same level while pensions and interest income rise, more income can become taxable without any increase in the headline tax rate.
The Personal Allowance and basic-rate limit are set to remain frozen at £12,570 and £37,700 through 2030/31.
For retirees, this matters because State Pension income, private pensions and savings interest are considered together when working out taxable income. A rise in one source of income can push more of another source into the tax net.
What Does the Savings Interest Tax Mean for Retirement Income?
The effect varies according to a person’s total income and tax band. For example, a basic-rate taxpayer earning £2,000 in savings interest could have £1,000 left to tax if the full £1,000 Personal Savings Allowance applies.
A higher-rate taxpayer with the same £2,000 of interest could have £1,500 subject to tax after using the £500 allowance.
Retirees should look at the interest earned across all taxable accounts rather than considering each account on its own. An AI stock analysis tool may help investors assess investments, but it does not replace personal tax planning.
How Can Over-65 Savers Reduce Tax on Savings Interest?
Can ISAs Protect Savings Interest From Tax?
Yes. Interest earned within an ISA is tax-free. The overall ISA allowance is £20,000 for 2026/27. From 6 April 2027, the standard Cash ISA limit will fall to £12,000 for people under 65. Savers aged 65 and over, though, will retain the full £20,000 Cash ISA limit. Premium Bonds can also offer tax-free prizes. Their returns are not guaranteed, and they work differently from conventional savings accounts.
Will the Savings Tax Burden Keep Rising?
The pressure could increase from 6 April 2027. The government plans to raise savings-income tax rates by two percentage points. This would take the basic rate to 22%, the higher rate to 42%, and the additional rate to 47%. The Personal Savings Allowance will remain unchanged.
Conclusion: What Should Over-65 Savers Watch?
The over-65 savings interest tax issue is becoming harder for retirees to overlook. Higher interest income, frozen allowances and planned tax changes could cut the amount earned from ordinary savings accounts. Retirees should check their tax band, total savings interest and available tax-free allowances. Reviewing ISA use before each tax year could also help some older savers retain more of their retirement income.
Disclaimer:
The content shared by Meyka AI PTY LTD is for research and informational purposes only. Meyka is not a financial advisory service, and the information provided should not be treated as investment or trading advice.
What brings you to Meyka?
Pick what interests you most and we will get you started.
I'm here to read news
Find more articles like this one
I'm here to research stocks
Ask Meyka Analyst about any stock
I'm here to track my Portfolio
Get daily updates and alerts (coming March 2026)