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Savers could see tax due on interest payments deducted directly from their salaries in future after Rachel Reeves approved rule changes on banks sharing customer details.

The chancellor wants it to be easier for HMRC to charge people the tax due on their savings, with an estimated 300,000 more people than five years ago now passing the threshold for when that payment kicks in.

Currently, basic rate taxpayers have a £1,000 personal allowance on earning interest tax-free. This drops to £500 for higher rate taxpayers and zero for additional rate. There’s also a £5,000 “starting rate” allowance but this drops with increased earnings and is wiped out for people who earn above £17,570 a year.

With wages rising, fiscal drag has meant many people have moved into the next tax band and therefore their tax-free allowance on savings interest is cut - which can lead to a hefty or unexpected tax bill.

The best way for savers to avoid such a scenario is, first and foremost, to ensure they are using a Cash ISA as their primary savings account, in which all earnings are tax-free. A £20,000 per person annual allowance applies to products across all ISA types, including investing ISAs or lifetime ISAs, for pensions or first-time buyers.

AJ Bell calculated British people would earn around £20bn from non-ISA cash accounts this year, with HMRC expecting to collect more than £6bn in tax from savers.

Letters will be sent with tax-code changes to those who face automatic deductions - meaning an unwelcome surprise in lower-than-expected take-home pay is on the agenda.

“For years, most savers didn’t give a second thought to paying tax on their interest – rates were low and the Personal Savings Allowance offered a generous cushion. But the landscape has changed rapidly. A combination of rising interest rates, frozen tax thresholds, more people being pushed into higher tax bands, and years of cash ISAs being overlooked means many are now being pulled into the tax net for the first time,” said AJ Bell’s Laura Suter, director of personal finance.

“For those who have moved their money to better-paying accounts and find themselves breaching the tax-free limit, many won’t realise until the taxman catches up.

“Self-assessment filers will need to declare any interest earned, but for those on PAYE, HMRC will collect the data directly from their payslip by adjusting their tax code. That can lead to a nasty surprise when people see their take-home pay suddenly fall.”

Banks will need to ask regular savings accounts customers for their National Insurance numbers starting from 2027, reports the Telegraph, which will then be passed on to HMRC.

Once the rule changes become passed into legislation, expected next year, customers should not need to do anything further unless more changes are announced.

Interest earned is already shared with HMRC but up to 20 per cent of it is “unreadable”, a report said, so tax cannot automatically be collected.

The government has previously said changes will cost £35m to implement, while banks likewise face huge costs to make systemic alterations.

An HMRC spokesperson said: “These reforms will make it easier for customers to get their tax right first time, including paying tax on savings income, by improving our ability to match third-party data to taxpayer records. Making better use of data will also help us prevent error and fraud on behalf of the honest majority.”