The Government has announced a four percentage point increase in tax on savings interest starting from April 2027, up from the two percentage point rise originally planned. The Chancellor confirmed the larger increase at the Autumn Budget on 28 October. This means savers will pay tax on interest earned above their personal savings allowance at 24 per cent, 44 per cent and 49 per cent for basic, higher and additional rate taxpayers respectively, compared with current rates of 20 per cent, 40 per cent and 45 per cent.
The move arrives at a time when interest rates on cash savings accounts are at their highest levels in years, with top fixed-rate bonds sitting above 5 per cent. This makes it easier for savers to breach their tax-free personal savings allowance. Basic rate taxpayers, with an income between £12,571 and £50,270, get an allowance of £1,000 before tax kicks in. At a savings rate of 4.5 per cent, they will start paying tax on unshielded pots of around £22,220. Higher rate taxpayers, earning between £50,271 and £125,140, get an allowance of £500, triggering tax on pots of around £11,110 at the same interest rate. Additional rate taxpayers, earning over £125,140, pay tax on all their savings interest, with no allowance.
For savers looking to shield money from the higher tax rates, Individual Savings Accounts (Isas) have become more valuable. Everyone gets a £20,000 tax-free Isa allowance each year, which can be split between cash and stocks and shares accounts as desired, with interest and returns free from the new tax hike. The Government has confirmed that the cash allowance will not be cut to £12,000 for under-65s from April 2027. Easy-access cash Isas currently offer rates around 4.5 per cent or higher, while fixed-rate options reach 5 per cent or above. If savers do not use their annual allowance, it is lost and does not carry over to the next year.
Beyond Isas, savers have other tax-efficient options. Premium Bonds now offer an annual fund prize rate of 4.35 per cent, with savers able to hold between £25 and £50,000 and potentially win tax-free prizes ranging from £25 to £1 million each month. Pension contributions also offer substantial tax relief, worth up to 100 per cent of annual earnings, with no capital gains tax or dividend tax due on investments within a pension. However, pension funds cannot be accessed until age 55, or 57 from April 2028.
Higher savings tax rates mean basic rate taxpayers will face tax on savings interest much sooner, while additional rate taxpayers face tax on all interest earned, making tax-efficient saving strategies far more important for protecting wealth from taxation.