Millions of savers are being dragged into paying tax on their hard-earned interest because of an outdated tax rule, a provider has said. Yorkshire Building Society warned on Monday (March 16) that taxpayers will have paid £28billion in tax on the interest on their savings since 2016 by April 5.

The lender said this is because the Personal Savings Allowance (PSA) has been stuck since it began in 2016 despite interest rate rises and frozen tax thresholds having pushed more people into higher tax bands since then.

Tina Hughes, director of savings at Yorkshire Building Society, said ordinary people are being penalised by a system which hasn’t kept pace with reality.

She added: “These aren’t wealthy investors — they’re people putting money aside for a house deposit, families saving for their children, or those planning a well-earned holiday.”

PSA is the annual amount of interest you can earn on your savings without paying tax. The allowance changes depending on your income tax band.

It covers the savings interest you receive each tax year, although ISAs are not included. The Government determines the limits for the PSA.

Basic rate taxpayers can earn up to £1,000 of interest on their savings without paying tax while higher rate taxpayers can earn £500 tax-free. Additional rate taxpayers don’t qualify for PSA.

Yorkshire Building Society said its experts crunched HMRC data and forecasts to outline the “staggering” impact of a long-ignored policy.

It said by the end of the 2025-26 tax year, taxpayers will have paid over £28bn in tax on their interest since the PSA was introduced, with basic rate taxpayers alone paying £4.7bn.

While the PSA remains frozen, the Bank of England base rate has soared from 0.50% to 3.75%, pushing ordinary savers over their allowances.

When the PSA was introduced on April 6, 2016, the majority of easy access accounts paid 1% or less, but according to the lender the majority now pay 3% or less.

Yorkshire said this means that in 2016 basic-rate-tax payers would have been able to put away a whopping £100,000 in a typical savings account.

In 2026, with interest rates hovering around 3%, savers would only be able to save around £33,000 without breaching their allowance.

For those earning over £50,271 and paying higher-rate tax, that amount would fall to around £16,000, according to the building society.

The lender pointed to savers being squeezed by the cost of living and people needing bigger nest-eggs just to reach ordinary milestones.

Yorkshire said the median average house deposit has increased from £25,000 in 2016 to £36,500 in 2024-5 – an increase of 46% in almost 10 years.

The building society said awareness of the PSA is low, with research carried out by the lender showing only 51% of people can correctly identify what it stands for.

Yorkshire Building Society also pointed to the Cash ISA allowance dropping from £20,000 to £12,000 for those under 65 from 2027.

It said this will leave savers with even fewer tax-free options.

A spokesperson said: “Combined with a PSA frozen for a decade, the pressures on anyone trying to save responsibly are escalating fast.”

Ms Hughes said: “When the PSA was introduced, almost no one breached it. Today, millions do — not because they’re rich, but because the allowance is frozen and thresholds haven’t moved.

“People doing the right thing are facing rising tax bills and fewer ways to protect their savings. It’s time for a modern, fair framework that gives savers clarity and confidence.”

Rachel Springall, finance expert at Moneyfactscompare.co.uk, said one of the best ways to shield savings returns from tax would be to use an ISA, but those without good guidance can overlook them.

She warned time is running out for savers to take advantage of the 2025-26 ISA allowance, adding: “They need to use it or lose it.

“Earning a decent return of interest can help boost nest eggs, which could be a huge difference to consumers suffering from an increase in the cost of living.

“Regularly checking rates and looking beyond the biggest high street banks is wise, because loyalty does not pay.”