Cash ISA alert: 1.2 million savers could face shock tax bill by the end of the year

Around 1.17 million one-year fixed-term adult non-ISA accounts are due to mature between June and December, according to research by Paragon Bank.

The analysis of CACI data indicates that seven in 10 of these maturing accounts will produce sufficient interest to breach Personal Savings Allowance thresholds.

The Personal Savings Allowance permits basic-rate taxpayers to earn up to £1,000 in interest tax-free, whilst higher-rate taxpayers can only earn £500 before incurring tax charges.

Many of these accounts are expected to generate over £500 in interest, potentially triggering tax liabilities for account holders.

Around £70.5 billion is held across 1.7 million accounts due to mature during this period. This poses a major tax risk for savers who benefited from high interest rates in 2023 and 2024.

Of those accounts, 822,000 are set to earn over £1,000 in interest, enough to trigger tax for basic-rate taxpayers. Additional-rate taxpayers face a tougher hit, as they get no Personal Savings Allowance at all.

Andrew Wright, Head of Savings at Paragon Bank, said: "Fixed-rate savings dominated the market during 2023 and 2024, with many accounts benefitting from high savings rates.

"Many savers will have had a great return on their savings but could ultimately breach their personal tax allowance as a result."

He added: "Many of those one-year accounts are now maturing over the next six months and nearly 1.2 million people could potentially receive a tax bill.

"Therefore, I urge savers review their accounts and make the most of their tax-free allowance by utilising other savings products, including cash ISAs."

The surge in cash ISA deposits reflects growing awareness of these tax implications amongst savers.

Rachel Springall at Moneyfactscompare.co.uk said: "In terms of the cash ISA market, savers have been rushing to pile record-breaking amounts of money into them."

Bank of England statistics reveal that approximately £14 billion was deposited into cash ISAs during April alone, marking a monthly record.

"It is evident that cash ISAs are highly sought after," Springall noted, attributing the significant deposits to "the noise surrounding cash ISA reforms and the rush of savers looking to protect their hard-earned cash from tax."

She added: "The popularity of cash ISAs is expected to linger, as millions of people are expected to pay higher-rate tax at 40 per cent this tax year."

The combination of maturing high-interest accounts and increasing numbers of higher-rate taxpayers has created a perfect storm for potential tax liabilities.

Savers who took advantage of attractive fixed rates during the past two years now face a dual challenge: finding competitive replacement rates whilst managing their tax exposure.

The timing is particularly problematic as more taxpayers are being pushed into higher tax brackets, reducing their Personal Savings Allowance from £1,000 to just £500.

The record-breaking cash ISA deposits seen in recent months suggest many savers are already taking protective action, though hundreds of thousands may still be unaware of their potential tax exposure as their fixed-term accounts reach maturity.