The Personal Savings Allowance has been frozen in time for too long: Tina Hughes

One of the clearest examples is the Personal Savings Allowance (PSA), which has remained untouched since its introduction in 2016. A decade ago, it felt generous and pragmatic.

Interest rates were near zero, and very few people came close to breaching their allowance. But today, with rates significantly higher, this once‑useful buffer is becoming a growing tax trap.

By the end of this tax year, HMRC forecasts suggest that savers will have paid an astonishing £28 billion in tax on their savings interest since PSA was introduced, with basic‑rate taxpayers alone contributing £4.7 billion.

That is not the mark of a system protecting ordinary households — it is the sign of one quietly penalising them. The PSA still sits at £1,000 for basic‑rate taxpayers and £500 for higher‑rate taxpayers, despite interest rates rising from 0.50 per cent to around 3.75 per cent over the same period.

In practice, this means that a saver earning an average rate could once hold £100,000 in a typical account without paying tax on the interest will now breach the allowance with just £33,000. For higher‑rate taxpayers, the amount they can hold falls to around £16,000.

This shift hasn’t been driven by savers making extraordinary gains. It has happened because the rules have failed to adjust to economic reality — and because rising tax thresholds and fiscal drag have quietly pushed more people into higher tax bands.

Since 2016, 2.1 million additional people have become higher‑rate taxpayers, and by 2030, the OBR expects another 4.4 million to be pulled into the same bracket because of fiscal drag. All of these individuals will see their PSA halved overnight, even though their real income hasn’t meaningfully risen.

At the same time, the cost of living has increased significantly. The median average house deposit has risen 46 per cent since 2016, reaching £36,500 in 2024–25. Families are trying to do the right thing — save more, prepare earlier, build resilience — yet find that the tax system chips away at their progress every step of the way.

Even more concerning is how poorly understood the PSA is. Yorkshire Building Society research shows that although many people believe they know what it stands for, over half cannot identify the limits, and 36 per cent have never heard of it at all.

Only 31 per cent would know how to pay the tax if they exceeded the allowance. A fifth would have no idea where to begin. This lack of awareness is not just a knowledge gap — it is a risk.

Savers could be hit with unexpected bills or unintentionally fall foul of HMRC rules, simply because the system has grown too complex, too opaque, and too outdated.

Compounding the issue, ISA rules are also tightening. From 2027, the Cash ISA allowance will fall from £20,000 to £12,000 for savers under 65, reducing the number of tax‑free options available at the very moment when protecting savings matters most.

Combined with a frozen PSA and rising rates of tax on savings and dividends more broadly, savers are being squeezed from all sides.

What we are witnessing is a tax environment that has failed to keep pace not just with interest rates, but with the financial pressures of modern life. Savers are doing everything right — budgeting carefully, planning ahead, and trying to build security for their families — yet the framework designed to support them has barely moved in a decade. It is, quite literally, frozen in time.

If we want a nation that saves confidently, we must give people a system that recognises the world they are living in now. That means a modernised PSA, clear and stable ISA rules, and accessible guidance that empowers people rather than confuses them. Savers deserve a framework that supports their efforts — not one that punishes them for doing the right thing.

As we look ahead to the next era of tax‑free saving, the message is simple: the world has changed — and our savings system must change with it.

Tina Hughes is Director of Savings for Yorkshire Building Society