A few months back I noticed my tax code had changed. No letter explaining why — just a slightly different number on a payslip that made me stop and go "hang on, what's happened here?" Turns out HMRC had quietly adjusted it to claw back tax on savings interest I hadn't realised was taxable. I'd had a decent chunk sitting in a savings account earning actual interest for the first time in years, and hadn't given a moment's thought to whether the taxman wanted a slice of it. Does this sound familiar?

If it doesn't yet, it might soon.

£153.7 billion in a month

New HMRC figures show the government collected £153.7 billion in tax and National Insurance in the two months to the end of May 2026 — £9.8 billion more than the same period the year before. Income tax receipts alone were up 9.7% year-on-year, and are now more than 50% higher than in May 2021. According to AJ Bell's head of personal finance, Sarah Coles, the May income tax take has risen by 53% for the month alone since 2021.

Here's what makes that number so striking: none of the actual tax rates have gone up. Instead, the personal allowance (£12,570) and higher-rate threshold (£50,270) have been frozen since April 2021 — a freeze meant to end this year but now extended twice, most recently by Rachel Reeves, all the way to April 2031. Wages keep rising with inflation. The thresholds don't move. Every payrise quietly nudges more people into paying more tax, or into a higher band, without a single headline rate changing. It's called fiscal drag, and it does its work in the background while everyone's looking the other way. If the personal allowance and higher-rate threshold had kept pace with inflation, they'd be £15,861 and £63,431 today — a gap of over £13,000 on the higher threshold alone.

The bit that catches savers out

This is where my tax code story comes in, because there's a trap here that gets far less attention than "more people paying 40% tax" — and it's the one hitting ordinary savers.

Everyone gets a Personal Savings Allowance (PSA), letting you earn a set amount of savings interest completely tax-free each year. But it's not the same for everyone:

  • Basic-rate taxpayers: £1,000 tax-free

  • Higher-rate taxpayers: just £500

  • Additional-rate taxpayers: £0 — nothing at all

The moment fiscal drag tips you from basic-rate into higher-rate, your tax-free savings allowance is cut in half overnight. And here's the kicker: the PSA has never been increased since it was introduced in 2016, when savings rates were practically nothing. They're a good deal higher now, so more people than ever are bumping up against these limits on fairly ordinary amounts of savings. Rachel Springall, a finance expert at Moneyfactscompare, put it plainly: the PSA is "outdated and needs to change." I'd go further — it's one of those allowances that quietly stopped doing its job years ago and nobody's fixed it.

It's not just savers on the edge of the higher-rate band, either. In 2023/24 there were 5.76 million higher-rate taxpayers, up 654,000 in a single year, with the Office for Budget Responsibility projecting millions more crossing that line in the years ahead. Quilter's Shaun Moore says frozen thresholds are "redrawing the shape of the nation's taxpayers," pulling in teachers, nurses and other professionals who never used to think of themselves as higher-rate at all.

So what can you actually do about it?

Nobody's unfreezing these thresholds for you, so it's worth being deliberate about where your savings sit:

  1. Use your ISA allowance. Interest inside a Cash ISA doesn't count towards your PSA at all — it's simply tax-free. If you're holding meaningful savings outside an ISA, that's the first thing I'd look at.

  2. Pension contributions can pull you back down a band. Extra contributions get relief at your marginal rate and can bring your taxable income back under the higher-rate threshold.

  3. Consider spreading savings with a spouse or partner. If one of you pays a lower rate of tax, holding more interest-earning savings in their name can keep more of it untaxed.

Core9's compound interest calculator is worth a play if you want to see how much that ISA shelter is really worth over ten or twenty years.

Final Thoughts

  • The UK collected £153.7bn in tax in just two months this spring, with income tax receipts up nearly 10% year-on-year.

  • No tax rates have risen — this is fiscal drag, caused by thresholds frozen since 2021 and now locked until 2031.

  • Your Personal Savings Allowance halves from £1,000 to £500 the moment you cross into higher-rate tax, and disappears completely in the additional-rate band.

  • The PSA hasn't been increased since 2016, even though savings rates are much higher now — meaning more ordinary savers are quietly becoming liable for tax on interest.

  • ISAs, pension contributions and spousal transfers are the main practical ways to protect your savings interest from this squeeze.

This article is here to give you some information and is for educational purposes only. It is not meant to give you financial advice. It is always a good idea to chat with a financial adviser who knows you well and can help you make the best decisions for your situation.

Sources

1. https://ifamagazine.com/aj-bell-income-tax-take-rises/

2. https://www.blickrothenberg.com/insights/detail/hmrc-stats-may-2026-rising-tax-receipts-still-not-enough/

3. https://moneyweek.com/personal-finance/tax/tax-thresholds-frozen

4. https://www.gbnews.com/money/hmrcs-tax-threshold-freeze-fiscal-drag

5. https://www.hl.co.uk/savings/guides/personal-savings-allowance