Why over 65s are paying £2.5 billion in tax on their cash savings interest and how you could reduce your bill

Cash savings have an important role to play in your financial plan.

A healthy cash savings account could be useful when you face unexpected costs such as car repairs or a large energy bill. Having a cash reserve to draw from means you don’t need to use credit cards or personal loans, which can incur significant interest.

You might also use cash savings to pay for short- to medium-term goals such as a holiday.

However, if you hold too much cash, you may have to pay tax on the interest you generate. Recent figures show that this is becoming more common, especially for older generations.

According to MoneyWeek, over-65s are predicted to pay a total of £2.5 billion in tax on their cash savings interest in 2025/26 – an increase of 215% since 2022/23.

Read on to learn why this is happening and how you could protect your savings.

You could pay tax on interest that exceeds your Personal Savings Allowance

If you place wealth in a non-ISA cash savings account and generate interest on it, you may have to pay tax on that growth.

Fortunately, you may have certain allowances and exemptions that shield a portion of your interest from tax. The allowances you benefit from depend on the rest of your income.

If your income – either from your salary or other taxable sources such as a pension – exceeds the Personal Allowance of £12,570 in 2025/26, the Personal Savings Allowance (PSA) applies.

Your PSA is dependent on your marginal rate of Income Tax. In 2025/26, the PSA is:

£1,000 if you are a basic-rate taxpayer paying 20%
£500 if you are a higher-rate taxpayer paying 40%
£0 if you are an additional-rate taxpayer paying 45%.

Any interest you earn up to the PSA is tax-free. Anything that exceeds the PSA is taxed at your marginal rate of Income Tax.

For example, if you had £30,000 in a savings account with an interest rate of 4.8% – the best easy-access savings account rate on 30 September 2025, according to Moneyfacts – you would earn £1,440 interest.

As a higher-rate taxpayer, you would have a PSA of £500. This means you would pay Income Tax on the remaining £940, leaving you with a bill of £376.

The starting rate for savings may apply if your earnings are below the Personal Allowance

If your taxable earnings – excluding cash savings interest – fall below £17,570, you may benefit from the “starting rate for savings”, which allows you up to an additional £5,000 in tax-free interest.

The figure of £17,570 is made up of your:

£12,570 Personal Allowance
£5,000 starting rate for savings.

You also benefit from the PSA of a basic-rate taxpayer.

This means you wouldn’t pay tax on your cash savings interest unless it exceeded £18,570.

So, if you had an income of £12,000 from your pensions, for instance, you could earn up to £6,570 in interest from your cash savings before paying any tax.

3 ways to reduce the tax you pay on cash savings interest

If you are concerned about the tax you might pay on your cash savings interest, here are three ways to potentially reduce your liability.

1. Save or invest in an ISA

Saving in a Cash ISA is one of the most effective ways to reduce your tax liability as you don’t pay any Income Tax on interest earned within this tax wrapper.

Alternatively, if you’re holding large amounts of cash and paying significant tax on your interest, you may consider investing a portion of that wealth instead.

Investing through a Stocks and Shares ISA means you won’t pay any Dividend Tax or Capital Gains Tax (CGT) on your returns.

You may also achieve higher returns than with a cash savings account, meaning you’re more likely to beat inflation.

As of 2025/26, you can contribute up to £20,000 across all your ISAs, and taking advantage of this allowance could help you reduce your tax bill.

2. Purchase Premium Bonds

Premium Bonds may be a suitable option if you want to reduce your cash holdings but still want to access that wealth in the short term. For example, you might use them as an emergency fund or to pay for holidays.

While you won’t generate interest, each £1 invested gives you one entry into a monthly draw, with prizes ranging from £25 to £1 million.

Crucially, all prizes are tax-free.

You can also cash out your Premium Bonds quickly if you need the funds for emergency expenses.

However, you might only win small prizes – or nothing at all in some months – so Premium Bonds may not provide reliable growth.

3. Draw a tax-efficient retirement income

If you’re retired, it’s important to consider how you draw an income. If you can keep your taxable income below the £17,570 threshold for the starting rate for savings, you can earn more tax-free interest.

You might achieve this by using a mixture of pension income and tax-free sources of wealth.

For example, if you were to take £20,000 from your pensions to fund your lifestyle, you wouldn’t qualify for the starting rate for savings.

However, if you took £16,000 from your pensions and another £4,000 from an ISA – which is tax-free – your taxable income would be below the threshold, allowing you to benefit from the starting rate for savings.

We can help you find the most tax-efficient way to draw an income from your savings.

Get in touch

Paying tax on your cash savings interest could erode your growth. We can help you prevent this.

Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2025 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate NS&I products.