Over 8.6 million adult non-ISA savings accounts across the UK are generating enough annual interest to breach personal savings allowance (PSA) thresholds, new research by Paragon Bank has indicated.

Paragon’s analysis of CACI data show that these accounts, which equate to £634bn in balances, are now generating enough annual interest to exceed the PSA of £500, the limit applying to higher rate taxpayers.

The bank suggested the findings show the £500 PSA is becoming increasingly restrictive as interest rates remain elevated and balances grow. As a result, far more savers are paying tax on their returns.

While higher rate taxpayers face a £500 cap and additional rate taxpayers receive no allowance at all, the data showed that even the traditionally more generous £1,000 PSA was being breached by over five million accounts, or £521bn in balances.

The steepest exposure in PSA breaches is being driven by savers with moderate to large balances. Two million accounts containing balances of up to £25,000 breach the £500 PSA, with only 68,000 breaching the £1,000 PSA, while 5.2 million accounts with balances of between £25,001 and £100,000 generate interest in excess of £500, falling to 3.6 million generating over £1,000.

Savers with more than £100,000 nearly universally exceed the PSA, with over 1.37 million accounts above the £500 and £1,000 limits.

Head of savings at Paragon Bank, Andrew Wright, said: “The PSA once shielded most people from paying tax on their savings, but the landscape has changed. With higher account rates and more people holding larger balances, millions are now paying tax without realising it.

“A cash ISA is the simplest way to prevent that. It ensures that every penny of interest stays in the saver’s pocket. As we approach the new tax year, we expect more people to turn to ISAs to safeguard their returns.”

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