The Personal Savings Allowance is stuck in 2016. Ordinary people are paying the price

Interest rates were low, inflation was subdued and most savers earned very little on their balances. The policy did what it set out to do. It protected ordinary people from paying tax on modest returns.

That world has gone.

Interest rates have risen sharply. Inflation has pushed up the cost of everything from food to housing. Yet the allowance has not moved. It remains fixed at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers, exactly where it was nearly a decade ago.

The result is simple. More people are paying tax on their savings, not because they are wealthier, but because the system has not kept pace.

In 2016, a basic rate taxpayer needed around £100,000 in savings to exceed the allowance. Today, with rates closer to 3%, that figure is nearer £33,000. For higher-rate taxpayers, it is closer to £16,000. These are not large sums set aside for speculation. These are balances built slowly for deposits, for emergencies, for life events.

We are seeing the impact already. The number of people paying tax on their savings has more than doubled in just three years. Millions more are being pulled into higher-rate tax bands as thresholds remain frozen. When that happens, the allowance halves overnight. Nothing about someone’s financial reality changes, yet their tax position does.

Over time, this adds up. By the end of the 2025 to 2026 tax year, savers will have paid an estimated £28 billion in tax on interest since the allowance was introduced. That includes £4.7 billion from basic rate taxpayers alone.

It is hard to argue this reflects the original intention of the policy.

At the same time, the goals people are saving for have become more expensive. The average house deposit has risen sharply. The cost of a wedding has climbed. Even maintaining a modest financial buffer now requires larger balances than it did ten years ago. Savings are not a luxury. They are a necessity. They are the cushion that allows households to absorb shocks without falling into debt.

There is also a wider issue of understanding. Many people do not fully grasp how the allowance works or when they might cross it. Others are unaware of the options available to manage their savings tax efficiently. That lack of clarity matters, particularly when so much money sits in low-paying accounts that offer little return.

The current approach risks sending the wrong signal. If relatively modest balances now generate a tax bill, it becomes harder to encourage people to build resilience. That matters when many households could only cover a few months of expenses if their income stopped.

A review of the Personal Savings Allowance is overdue. At the very least, it should reflect today’s economic conditions rather than those of 2016. Linking it to inflation would be one way to ensure its relevance over time. Raising the thresholds would provide immediate relief. Improving public understanding would help people make better decisions with the money they have worked hard to save.

None of this requires a radical overhaul. It requires recognition that the environment has changed.

Savings policy should keep pace with real life. Right now, it is falling behind.

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Tina Hughes is Director of Savings at Yorkshire Building Society.

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