While much of the focus from the recent Budget was on changes to cash ISAs, a significant and less-publicised announcement is set to impact the savings of millions across the UK. Chancellor Rachel Reeves has confirmed that the rate of tax applied to savings interest will increase, a move that could quietly erode the returns on your hard-earned cash.
The Personal Savings Allowance Tax Hike
Currently, basic-rate taxpayers benefit from a Personal Savings Allowance of £1,000. This means you can earn up to this amount in savings interest each year completely free of tax. However, any interest earned above this threshold is currently taxed at 20%.
From April 2027, this tax rate will climb to 22%. For a practical example, if you were to save your money in a top easy-access account paying around 4.5%, you would need a savings pot exceeding £22,000 to be at risk of breaching your allowance and facing this new tax.
Higher and Additional Rate Taxpayers Face a Bigger Bill
The hit is even more substantial for those on higher incomes. Higher-rate taxpayers, who currently pay 40% tax on savings interest over their £500 allowance, will see their rate jump to 42% from April 2027.
Additional-rate taxpayers, who do not receive a personal savings allowance and pay 45% on all their savings interest, will be subject to a new rate of 47%.
Sarah Coles, head of personal finance at Hargreaves Lansdown, warned: “The personal savings allowance will still protect the first £1,000 of savings interest for basic rate taxpayers and £500 of interest for higher rate taxpayers, but after that people will face a hike in their tax bill.”
Cash ISA Rules Are Changing Too
The Budget also brought changes to the rules for cash ISAs, which remain a vital tool for protecting your savings from tax. Money held within any ISA is completely shielded from tax on interest.
Presently, you can save up to £20,000 each tax year across your ISA accounts. However, from April 2027, a new cap will be introduced for savers under the age of 65. They will only be able to put £12,000 per year into a cash ISA.
The overall ISA allowance stays at £20,000, meaning you could, for instance, save £12,000 in a cash ISA and the remaining £8,000 in a stocks and shares ISA. It is important to note that savers aged 65 and over will not be affected by this new limit and can continue to save up to £20,000 annually into a cash ISA.
Ms Coles emphasised the urgency for savers: “It’s going to be more important than ever to take advantage of cash ISAs... The change to the cash ISA allowance will not happen overnight so there is still an opportunity to take advantage of your allowance this year.”
With these tax changes on the horizon, reviewing your savings strategy has never been more critical to ensure your money works as hard as possible for you.
