Chancellor John Healey has doubled the tax surcharge on savings and buy-to-let rental interest to 4%, lifting income tax rates on savings interest above the Personal Savings Allowance to 24% for basic-rate taxpayers, 44% for higher-rate taxpayers and 49% for additional-rate taxpayers. The new rates take effect on April 6, 2027.
The move follows a 2% increase announced by former Chancellor Rachel Reeves in her final Budget in November 2025. Healey's decision surprised savers, and analysis suggests further raids on what Labour calls "unearned income" could follow.
Five ways to limit the pain
Jason Hollands, managing director at wealth manager Evelyn Partners, said Healey's Budget had a nasty tax sting in the tail for savers and suggested five ways to reduce the impact.
1. Use your ISA allowance
Savers can put up to £20,000 a year into an ISA, with all interest, dividends and capital gains tax-free. Couples can shelter up to £40,000 between them. Hollands said savers should consider moving non-ISA savings into a Cash ISA and non-ISA shares into a Stocks and Shares ISA, a process known as Bed & ISA. "Maximising ISA allowances is now more important than ever," he said. Under-65s can still use the full £20,000 Cash ISA allowance, although younger savers should consider the higher potential returns from stocks and shares.
2. Check how much cash you need
Keeping enough cash for emergencies is sensible, but holding more than needed for years could mean missing out on investment growth while leaving interest exposed to tax. Hollands said holding more cash than necessary can mean missing out on stock market growth, and the tougher tax treatment of savings interest is a further consideration. "Investments involve more risk as markets can fall as well as rise, so this won't suit everyone."
3. Use your partner's allowances
Married couples and civil partners should review their finances together. Each person has their own Personal Savings Allowance, ISA allowance and annual exemptions for capital gains and dividends. Basic-rate taxpayers can earn £1,000 in savings interest tax-free, while higher-rate taxpayers get £500. Additional-rate taxpayers get nothing. Hollands said transferring savings to a partner paying a lower tax rate could reduce the family's bill, but it must be genuine: "The money becomes theirs, both legally and in practice."
4. Consider Premium Bonds
Adults can hold up to £50,000 in Premium Bonds, with holdings entered into a monthly prize draw. Prizes are tax-free and do not use up your Personal Savings Allowance. The current prize rate is 4.35%, but in some years you might win nothing. Hollands said Premium Bonds are no substitute for guaranteed interest.
5. Explore gilts for larger sums
Short-dated, low-coupon UK Government bonds, known as gilts, may suit people with savings they will not need immediately. Some pay little interest but trade at a price below the amount repaid at maturity. Interest is taxable, but capital gains on UK gilts are exempt from capital gains tax, potentially making them attractive to higher-rate taxpayers. However, prices can fall and selling before maturity can mean a loss. Savers should carefully compare likely after-tax returns and consider professional advice before investing.
