Savers to pay higher tax on interest after Budget tax raid
The highest earners face a near-50% tax rate on savings interest from April 2027 after chancellor John Healey launched a tax raid on savers.
Tax on savings income was already set to rise by two percentage points in April, but will now rise by four percentage points after Healey announced a further two percentage point rise in the 2026 Autumn Budget.
The move will bring savings tax rates to 24% for basic rate taxpayers, 44% for higher rate taxpayers, and 49% for additional rate taxpayers in the 2027/28 tax year.
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|
Income tax band |
Savings tax rate (2026/27 tax year) |
Savings tax rate (2027/8 tax year onwards) |
|
Under £12,571 (personal allowance) |
0% |
0% |
|
£12,571 to £50,270 (basic rate) |
20% |
24% |
|
£50,271 to £125,140 (higher rate) |
40% |
44% |
|
Over £125,140 (additional rate) |
45% |
49% |
You will normally be taxed on your savings when you earn interest from money held in a non-ISA savings account that goes over the amount you can have tax-free.
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The main mechanism that allows people to earn savings interest outside an ISA without paying tax is the personal savings allowance.
The allowance is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers. Additional rate taxpayers do not get the allowance.
People on incomes lower than £18,570 can also earn up to £5,000 extra from savings interest tax-free thanks to the starting rate for savings. This £5,000 allowance is reduced at a rate of £1 for every £1 you earn in non-savings income over £12,570.
Bear in mind that savings interest counts towards your taxable income. Interest earned could therefore tip you into a higher income tax band and potentially reduce or remove your personal savings allowance.
High earners with taxable income over £125,140 will be especially hit by the policy as any interest they earn on savings held outside a cash ISA will be taxed at 49%.
At the Budget, Healey said that despite increasing tax rates, “88% of people will pay no more tax on their savings”.
Isabella Galliers-Pratt, senior investment director at wealth manager Rathbones, said: “The decision to increase tax on savings income makes holding large amounts of cash on deposit increasingly unattractive, particularly for higher and additional rate taxpayers.
“Cash will always have an important role in providing liquidity, but the tax changes significantly alter the equation for money held beyond immediate needs. For an additional rate taxpayer facing a 49% rate on taxable savings income, a 4% savings rate would deliver just 2.04% after tax.
“For those holding substantial excess cash, that growing opportunity cost will become increasingly difficult to ignore.”
The table below shows how much more tax you can expect to pay on your savings interest after you use your tax-free savings allowances following next year’s changes.
| Row 0 – Cell 0 |
Savings tax rate |
Tax due on £1,000 interest |
Tax due on £5,000 interest |
Tax due on £15,000 interest |
|
2026/27 |
20% |
£200 |
£1,000 |
£3,000 |
|
2027/28 |
24% |
£240 |
£1,200 |
£3,600 |
|
Difference |
Row 3 – Cell 1 |
£40 |
£200 |
£600 |
|
2026/27 |
40% |
£400 |
£2,000 |
£6,000 |
|
2027/28 |
44% |
£440 |
£2,200 |
£6,600 |
|
Difference |
Row 6 – Cell 1 |
£40 |
£200 |
£600 |
|
2026/27 |
45% |
£450 |
£2,250 |
£6,750 |
|
2027/28 |
49% |
£490 |
£2,450 |
£7,350 |
|
Difference |
Row 9 – Cell 1 |
£40 |
£200 |
£600 |
Source: AJ Bell, assumes all interest shown is taxable, any available tax-free allowances have already been used, and the interest falls entirely within the stated band.
Cash ISA allowance changes axed
While tax rates are set to increase significantly on cash held outside an ISA, the silver lining for cash savers is that chancellor John Healey decided to reverse the previous government’s unpopular ISA reforms.
The annual cash ISA limit was set to fall from £20,000 to just £12,000 for under 65s from April 2027, but Healey reversed these changes at the Budget, meaning it will stay at £20,000. This is the overall annual ISA allowance, and contributions can be split across different types of ISA.
How to avoid paying tax on your savings interest
With tax rates on interest earned outside an ISA rising, keeping cash in a tax-wrapper will become more important than ever for savers.
We look at what you can do to avoid paying tax on your savings interest.
Check your personal savings allowance
Your personal savings allowance lets you earn a set amount of savings interest from a non-ISA before any tax is due.
Before you put money into a savings account, you may want to calculate how much interest you expect to earn from your deposit and see if it will exceed the tax-free allowance.
If the interest you expect to receive is within your allowance, then you will not need to do anything as your interest will not be taxed.
But if you find the deposit will earn more interest than your tax-free allowance, you may want to consider moving the money into a tax wrapper if you can.
If your income is very close to the next tax threshold, you should check whether your savings interest will push you into a higher tax band and cause your personal savings allowance to be reduced.
Put your cash into an ISA
Individual Savings Accounts (ISAs) are one of the most powerful tools savers have to protect their money from tax.
You can hold investments and/or cash in ISAs, and any growth you get from money held in them – whether it is interest payments or investment returns – is entirely exempt from income tax, capital gains tax and dividend tax.
Jason Hollands, managing director at wealth manager Evelyn Partners, said: “The looming tax increases on cash savings and already implemented hikes on [capital gains tax] and dividend taxes, make maximising ISA allowances incredibly important whether you’re a saver or an investor.”
You can only put a maximum of £20,000 into ISAs each year. You can put this amount into one type of ISA or divide it between different types, such as an investment ISA and a cash ISA.
That means if you use most of your annual ISA allowance for cash savings, there will be less left over to protect your investments from tax.
Hollands says you should review the balance of your wealth held between cash and investments.
“Having a cash rainy-day fund is very wise; it can help cover unexpected bills and avoid having to sell investments at the wrong time. But holding more cash than you need for several years can mean missing out on the potential for longer-term investment growth.
“The much tougher tax treatment of savings interest than gains on investments and dividend income is a further consideration. Of course, investments involve more risk as markets can fall as well as rise, so this course of action won’t suit everyone.”
Consider Premium Bonds
Premium Bonds are a savings product offered by government-backed savings bank National Savings and Investment (NS&I).
You don’t earn a guaranteed interest rate with this product. Instead, Premium Bonds holders are entered into monthly prize draws where you have the chance to win prizes between £25 and £1 million.
Every £1 you save in Premium Bonds translates into one entry into the monthly Premium Bonds prize draw and you can hold up to £50,000 in Premium Bonds.
Any Premium Bonds prizes you win are entirely tax-free, but as the prizes are distributed randomly there is no guarantee that your money will actually grow.
Consider alternatives to cash
Cash savings are popular because of their simplicity and safety. The money you hold in cash won’t fall in value, although it can be eroded by inflation.
If you are trying to avoid paying tax on your savings interest, and you already have an emergency savings pot in an easy access account, there are other options that offer cash-like returns and safety.
Galliers-Pratt at Rathbones said: “For money that is not needed immediately, investors may want to look more closely at alternatives, including short-dated, low-coupon gilts. While the coupon is subject to income tax, any capital gain on a gilt is generally free from capital gains tax for individual investors.”
Gilts are UK government bonds that are issued when the government needs to borrow money and can be bought by investors.
They are effectively an “IOU”. You buy a gilt and the government promises to pay the money back to you after a certain amount of time, including a fixed rate of interest called the coupon.
“At current yields, some short-dated, low-coupon gilts can offer a post-tax return of more than 4% for an additional rate taxpayer. Once the 49% savings rate [for additional rate taxpayers] takes effect, a savings account would need to pay more than 8% gross to produce a comparable net return,” says Galliers-Pratt.
“The message is not that people should abandon cash. It is about distinguishing between money needed for emergencies and short-term spending, and substantial excess cash that could potentially be working harder elsewhere.”
