Financial expert Martin Lewis has issued an urgent alert to UK savers following Chancellor Rachel Reeves's first Budget, warning that many will face higher taxes on their savings from 2027.
The Budget Announcement and Tax Changes
In her Budget statement to the Commons, Chancellor Rachel Reeves confirmed a significant shift in how savings income will be taxed. Tax rates on savings, property, and dividend income will increase by two percentage points across the basic, higher, and additional rates, effective from 6 April 2027.
Reeves justified the move by highlighting a disparity in the current system, stating, "Currently, a landlord with an income of £25,000 will pay nearly £1,200 less in tax than their tenant with the same salary." She argued that the reform creates a fairer system, noting that even after the change, 90% of taxpayers will pay no tax on their savings.
Martin Lewis Explains the Impact on Your Pocket
Martin Lewis was quick to clarify the practical implications for savers. He explained that from April 2027, the tax on savings interest will rise. This means:
- Basic-rate taxpayers will see their savings tax rate jump from 20% to 22%.
- Higher-rate taxpayers will pay 42%, up from 40%.
- Additional-rate taxpayers will face a new rate of 47%.
Lewis emphasised that this tax is only applied to interest earned that exceeds your Personal Savings Allowance. This allowance is £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and nil for additional-rate taxpayers.
Understanding the Crucial Savings Thresholds
Martin Lewis has previously detailed how the £10,000 and £20,000 savings thresholds are key to understanding your tax liability. For a basic-rate taxpayer, having £20,000 in a savings account earning 5% interest would generate £1,000 annually. This amount would fall entirely within their £1,000 Personal Savings Allowance, meaning they would pay no tax.
However, for a higher-rate taxpayer with the same £20,000, the £1,000 interest would exceed their £500 allowance. They would therefore be taxed on the £500 excess.
Lewis also explained the Starting Rate for Savings, a lesser-known allowance for those on lower incomes. If your total annual earnings from all sources are under £18,570, you could be eligible for an additional tax-free savings allowance of up to £5,000, on top of your standard Personal Allowance and Personal Savings Allowance.
Industry Backlash and Warnings
The Chancellor's move has drawn criticism from financial industry leaders. Nigel Green of deVere Group warned that the policy "imposes fresh barriers on anyone who actually saves or invests," potentially driving capital away from the UK.
Mike Salem from the Consumer Choice Centre echoed these concerns, stating the move "punishes responsible financial behaviour" and leaves families with less financial flexibility.
The consensus among experts is clear: with the new tax rates coming into effect in 2027, savers are being urged to review their financial arrangements, particularly the benefits of shielding money in Cash ISAs, where interest remains tax-free indefinitely.
