Savers have been warned they could fall victim to ‘surprising tax traps’ people don’t realise - including even giving your children savings. The personal savings allowance, the amount that a saver can earn in interest outside an Isa without paying tax, has been frozen since it was introduced ten years ago. Last year, amid high inflation and interest rates, savers paid more than £6 billion in tax on savings interest, compared with £1.6 billion in 2016.

At the same time, some 2.8 million people paid tax on their savings in the 2025-2026 tax year, according to HM Revenue & Customs. This is up sharply from 1.3 million in the previous tax year.

The UK Personal Savings Allowance (PSA) allows individuals to earn tax-free interest on savings, based on their income tax band. Basic-rate (20%) taxpayers can earn up to £1,000 in interest annually tax-free, while higher-rate (40%) taxpayers can earn £500. Additional-rate (45%) taxpayers receive no PSA.

Personal finance expert Martin Lewis has previously warned that people with relatively small amounts of savings can end up paying tax. A basic rate taxpayer, 20% taxpayer, can earn £1,000 a year of interest in any form of savings at all without paying tax on it. Now, the top savings accounts at the moment pay about 4.5 per cent. So, you need about 22,000, just a little over £22,000 in the top savings account before you earned £1,000 interest.

“So, if you got less than that, you’re not going to be paying tax on your savings interest because it’s tax free. High rate tax because it’s within your personal savings allowance. High rate taxpayers pay £500 a year of interest they can make each year tax free. It’s about £11,000 saved at the top rate.

“If you’re an additional rate taxpayer earning over £125,000, you don’t get one of these. So, you got your personal allowance, your starting rate for savings, and on top of that up to another £1,000 in your personal savings allowance.”

Savers with a low income can sometimes earn even more in interest without paying tax — up to £5,000 under what is known as the starting rate for savings if your income is below the personal allowance of £12,570 - the amount you can earn each year before paying income tax. But after this, the allowance falls by £1 for every additional £1 of income you get over the threshold — you lose the entire extra allowance once you earn £17,570.

The complicated and little-known taper means that many believe they have a larger savings allowance than they do, perhaps because a part-time job or modest pension has reduced it by pushing their income over the personal allowance threshold.

Mr Lewis explained: “The next one not that many people know about is called the starting rate for savings. This is another £5,000 of savings interest you can earn a year on top of the personal allowance. And this is designed for people who have low work earnings but high interest on savings. Often people who are retired. And here’s how it works.”

“For every pound of earnings you earn above this allowance, you lose a pound on your starting savings rate. So imagine you earn £13,570. You’re a £1,000 above that. You can now only have £4,000 of tax-free interest in your savings due to the starting savings rate. And by the time you earn from work £17,570, this is gone. So it’s only for people on low work earnings and high interest on savings.”

Rachel Reeves, the chancellor, will increase income tax owed on savings interest by two percentage points next April. At the same time, she is cutting the amount that can be sheltered in a cash Isa by under-65s to £12,000 from £20,000.

The Times reported on a person who had been taxed £575.40 on savings interest that they did not even get. The shock tax bill occurred because HMRC will charge tax on the gross amount of interest earned — the figure before any deductions such as an interest penalty for early withdrawal on your account.

Renny Biggins of the Investing and Saving Alliance, an industry body, said: “HMRC will use the annual interest statement to calculate tax. Unless the provider has explicitly treated the early withdrawal penalty as a reduction of interest and netted it off before reporting to HMRC, it is likely HMRC will calculate the interest charge on the gross interest applied.”

The Times reported that people have fallen foul of HMRC procedures which mean it usually charges tax annually rather than when the interest is actually paid to the saver. A common situation where this can occur is with a multi-year fixed savings account or bond.

It said HMRC tends to charge tax annually on the interest accrued by the account or bond as if it was paid to the saver during that tax year, even if the terms of the account or bond mean the saver is not paid the interest until the end of the term.

This should be taken into account, particularly if you were hoping to get the interest, and pay any tax, in a year when you are in a lower tax band. For example, if you had bought a bond while earning a high income with the plan to retire before its term ends. You might have expected that your lower retirement income would automatically qualify you for a larger personal savings allowance and a reduced tax rate on the interest earned when you receive it at maturity.

In terms of parents, the Times report that if people give money to their children to save in their own names (in non-Isa accounts), there is an anti-avoidance rule to stop parents from shielding their own money from tax in children’s accounts. If the gift generates more than £100 in interest a year, the parent will have to pay tax on it if it is above their own personal allowance. The £100 limit does not apply to money given to children by grandparents, relatives or friends.

The top easy-access savings account pays 4.5 per cent a year for new customers of the bank Chase. The top one-year fixed-rate savings account is from MBNA at 4.66 per cent.

HMRC said: “While most people don’t pay any tax on their savings interest, we encourage savers looking to withdraw savings early to be aware of the rules around interest and early withdrawal charges.”