HM Revenue and Customs (HMRC) has confirmed that six million people are expected to face higher income tax bills on their savings interest following changes announced in the Autumn Budget. The tax authority estimates that around 13 per cent of taxpayers will be affected by 2031/32, with the changes coming into force from April 6, 2027.
New savings tax rates from April 2027
According to HMRC's latest policy paper, people who already pay income tax on savings interest above their tax-free allowances will face higher rates. The basic rate of income tax on savings will increase from 20 to 24 per cent, the higher rate from 40 to 44 per cent and the additional rate from 45 to 49 per cent.
These changes will apply across the UK, including Scotland, where separate income tax rates apply to earnings and pensions.
HMRC estimates that taxpayers affected by the savings changes will pay an average of £113 more annually in 2027/28.
It's important to be aware that the six million estimate relates to 2031/32 rather than the first year of the changes.
Over-55s disproportionately affected
HMRC's assessment found that people aged 55 and over are disproportionately represented among those expected to pay more tax on their savings. They account for 63 per cent of the affected group, compared with 39 per cent of the UK adult population.
However, most savers will not be affected because their interest earnings fall within existing tax-free allowances.
The Personal Savings Allowance currently allows basic rate taxpayers to earn up to £1,000 in savings interest each tax year without paying income tax. Higher rate taxpayers have a £500 allowance, while additional rate taxpayers do not receive a Personal Savings Allowance.
These allowances are not being reduced as part of the April changes.
Example of the impact
For example, a basic rate taxpayer receiving £1,500 in annual savings interest would have £500 above their £1,000 allowance, assuming no other tax-free savings relief applies. At the current 20 per cent rate, the tax on that £500 would be £100. From April 2027, the same taxable interest would attract £120 in income tax.
This represents an additional £20 a year, assuming the person's circumstances and savings interest remain unchanged.
Cash ISAs remain tax-free
Interest earned through Cash ISAs will continue to be exempt from income tax. The UK Government confirmed in the Autumn Budget that the annual ISA allowance will remain at £20,000, reversing earlier plans to reduce the Cash ISA limit.
Money held in Cash ISAs does not count towards the Personal Savings Allowance, meaning savers can earn tax-free interest within an ISA without using up their allowance for other accounts.
People with lower incomes may also qualify for the starting rate for savings, which can provide up to £5,000 of additional tax-free savings interest, depending on their other taxable income.
HMRC's assessment states that a basic rate taxpayer making full use of both the starting rate for savings and the Personal Savings Allowance would need more than £150,000 in savings outside an ISA, earning 4 per cent interest, before becoming liable for tax on the interest.
Paying tax on savings interest
Most people who owe income tax on savings interest do not need to complete a Self Assessment tax return solely because of that interest. Banks and building societies report savings interest to HMRC, which can collect tax owed through adjustments to PAYE tax codes.
People who already complete a Self Assessment must include taxable savings interest in their return. HMRC states that the April changes will not create new reporting obligations for savers, although those already paying tax on interest will need to be aware of the higher rates.
Further information about tax on savings interest is available on GOV.UK.
