Martin Lewis Savings Account Warning: Got £10,000 In Your Bank Account? You Could Get Higher Tax

MoneySavingExpert founder Martin Lewis has issued a stark warning to UK savers sitting on £10,000 or more in savings, cautioning that soaring interest rates could lead to unexpected tax bills on the interest earned.

With the 2025/26 tax year looming and key allowances frozen, basic-rate earners could breach their £1,000 personal savings allowance with just £20,000 in savings, while higher-rate taxpayers might hit this limit with half that amount.

This savings tax trap, amplified by 5 per cent interest rates, threatens millions amid cash ISA debates and HMRC crackdowns.

Personal Savings Allowance: Why £1,000 Interest Could Cost You

Lewis stresses that tax applies to interest, not the savings themselves. The personal savings allowance provides tax relief of £1,000 for basic-rate taxpayers in 2025/26. 'If you are a basic rate taxpayer – a 20% rate taxpayer, you are allowed to earn £1,000 of interest in all savings accounts tax free. Above £1,000 interest it is taxed,' he explained on his BBC podcast on 22 September 2025.

Higher-rate taxpayers receive just £500, with the allowance disappearing entirely for those earning over £125,000. At 5 per cent interest, £20,000 generates £1,000 annually—exactly the basic-rate cap, according to MoneySavingExpert calculations. HMRC data shows that 2.64 million people are facing savings tax bills this year, a sharp rise from previous freezes.

The personal allowance remains at £12,570 until 2028, pushing more earners into taxable brackets as wages rise.

Starting Rate for Savings: £5,000 Tax-Free Cushion for Low Earners

Low-income households can benefit from an additional £5,000 starting rate for savings at zero per cent tax, but only if their non-savings income falls below £17,570. Every pound earned above the £12,570 personal allowance chips away at this band, Lewis notes, urging savers to check their eligibility via HMRC tools.

For example, a pensioner with £10,000 saved at 4.76 per cent, yielding £476, would receive full tax relief if their income is below the threshold. This band, unchanged for 2025/26, helps protect modest pots but disappears for middle earners, according to GOV.UK guidance.

Lewis warns: 'The more you earn and the more savings you have, the more likely you are to be taxed on your interest.' Over 7 million higher-rate taxpayers now face the £500 limit, a significant increase from prior years.

Cash ISA Lifeline: The £20,000 Tax-Free Shield That Still Works

Cash ISAs provide a crucial lifeline, allowing savers to put away £20,000 per year without paying tax on interest. Lewis champions this tax-free option, saying, 'A cash ISA is just a savings account where the interest is never taxed and it doesn't count to your £1,000 a year, so it's an extra allowance on top,' spotlighting 4.76 per cent easy-access deals.

In July 2025, Chancellor Rachel Reeves backed away from plans to slash the ISA allowance to £4,000, preserving the full £20,000 tax-free shield for now. For those with £10,000 saved, shifting to an ISA could help avoid 20-40 per cent tax charges, potentially saving £100 annually at current rates.

Lewis polled his followers on X: 'Should the cash ISA allowance be cut? The Chancellor is rumoured to be cutting the tax free savings allowance from the current £20,000 PER TAX YEAR.'

With interest rates holding steady following the Bank of England's decision on 19 September 2025, Lewis urges: 'You don't pay tax on savings, it's the interest you earn on savings that are taxable. But most people won't earn enough interest because there are allowances that you're allowed to use.'

Smart moves like switching to an ISA can help nest eggs grow tax-free, but inaction could lead to HMRC letters by April 2026. As the 2025/26 tax year approaches, HMRC's 2.64 million savings taxpayers from 2024/25 signal rising stakes — with frozen allowances expected to push the number of affected households up by 15%, according to official projections.