The Bank of England has increased interest rates for the first time in more than three years, prompting a warning that savers could be tipped into paying tax on their savings interest.
The central bank raised borrowing costs in a bid to combat the rising cost of living for British households and businesses. Policymakers also warned that inflation is set to soar to around 5%. Bank Governor Andrew Bailey indicated that further hikes are likely if the Iran war is not resolved.
Impact on savers
Radio 4's Moneybox programme was told that while higher rates might seem like good news for savers, they can also push people into tax thresholds. In the Budget last month, Chancellor John Healey hiked savings interest tax rates.
Rachel Springall from financial data firm Money Factors told Radio 4 listeners: "It's a huge impact and gives us more of an indication of where rates might go."
She added: "I've had a look through a lot of the columnists' opinions on this one and they are expecting another rate rise unfortunately probably by the spring and there are some murmurings about another one later in the summer."
Tax changes and allowances
Basic rate taxpayers (20%) are allowed to earn up to £1,000 in savings interest tax-free annually, higher rate taxpayers (40%) can earn up to £500, while additional rate taxpayers face tax on all savings interest.
From April 2027, the levy on savings income will rise to 24% for basic rate taxpayers, up from the previously scheduled increase of 22%.
Presenter Paul Lewis noted that the number of higher rate taxpayers has doubled to 8 million since the threshold freeze started in 2022. They will pay 44% on savings interest.
Advice for savers
Chartered financial planner Ray Black, founder of Money Minder, said: "Not everybody with savings is going to pay more tax. We've still got the personal savings allowance that's £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and the ISAs still remain tax free."
He said people with savings of between £20,000 and £25,000 getting top rates of 3.5% to 4% may not feel the pinch, but those with more than £1,000 in savings interest will face a 20% increase.
Mr Black recommended people utilise tax-free ISAs. One caller, Janet, said she would be taxed at a 4% higher rate than her ex-husband for the same income, a situation Mr Black described as not "fair". Another caller mentioned her mother had substantial funds set aside for her care home which will face higher taxation. Listener Christopher characterised it as "taxing prudence".
Mr Lewis said: "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."
