Martin Lewis has warned that savers with more than around £11,000 could be hit by a tax raid following the Budget, as the Chancellor raised tax rates on savings interest without changing the tax-free thresholds.
The Chancellor did not alter the savings tax thresholds in the economic package. Basic rate taxpayers (20%) can earn up to £1,000 of savings interest tax-free each year, higher rate taxpayers (40%) can earn up to £500 tax-free, and additional rate taxpayers pay tax on all savings interest.
Tax rates on savings to increase
From April 2027, the tax on income from savings will rise to 24% for basic rate taxpayers, after it had been scheduled to rise to 22%. The savings higher rate will be 44%, and the savings additional rate will be 49%.
This means someone on the basic income tax rate can have £22,222.22 in savings at a 4.5% interest rate before they start paying tax on their savings interest. A higher-rate taxpayer needs to have £11,111.11 in savings at a 4.5% interest rate before they start paying tax.
Expert reaction to the Budget
Reacting to the Budget, personal finance expert Mr Lewis said: “Problem on savings though. If you’re saving and you pay tax on the interest, so you’ve used up your ISAs, you’ve used up your personal savings allowance, the £1,000 of interest you can make a year tax free from savings. Well, from April 2027, the interest on savings, the tax rates going up. Basic rate taxpayers will pay 24%, high rate taxpayers 44%, top rate taxpayers 49%. Basically, the normal rate plus 4%. So, it’s worth making sure you use your tax free allowances.”
Maike Currie, vice president of personal finance at PensionBee, said she believes a tax rise on savings interest could have a big impact on savers. She said: “The Chancellor has given savers a reprieve with one hand and taken more with the other. Reversing the planned Cash ISA allowance cut is welcome news, but behind the U-turn lurks a significant tax rise on savings interest outside an ISA.
“Last year’s Budget had already announced a two-percentage-point increase in savings income tax. Healey’s Budget adds another two percentage points, taking the total increase to four percentage points from April 2027. That means basic-rate taxpayers will pay 24 per cent on taxable savings interest, higher-rate taxpayers 44 per cent and additional-rate taxpayers a whopping 49 per cent.
“With the Personal Savings Allowance unchanged, savers earning interest above their tax-free limits will now hand over more of it to the taxman. The Cash ISA reprieve is therefore masking a much bigger tax grab on savings held outside the ISA shelter.”
Impact on retirees and investors
Currie added: “The rise could be particularly unwelcome for retirees holding larger cash balances. People drawing an income from invested pensions are often encouraged to keep a cash buffer, potentially covering a year’s worth of living expenses, so they can avoid selling investments during a market downturn. For those holding this money outside an ISA, the higher tax rates could take a bigger bite out of the interest they earn once their tax-free allowances have been exhausted.”
Andrew Prosser, head of investments at InvestEngine, said the Budget “could change how people choose to grow their money”. He said: “Today’s Budget sends a clear message to savers: while the £20,000 Cash ISA allowance remains intact, higher taxes on savings interest and a proposed new incentive for first-time investors could change how people choose to grow their money.
“The Chancellor has announced a further two percentage point increase in tax on savings interest from April 2027, on top of the rise announced in last year’s Budget. This means basic-rate taxpayers will pay 24 per cent on taxable savings interest, higher-rate taxpayers 44 per cent and additional-rate taxpayers 49 per cent. By contrast, interest and investment returns earned within an ISA remain free from UK income tax and capital gains tax.”
Cash ISA savers will not have their annual allowance slashed after plans to reduce the limit for under-65s next year were reversed in the Budget.
