Savers with £20,000 in savings are facing a 'considerable blow' as a BBC expert highlighted 'confusion' surrounding tax changes announced in last week's Budget - after Chancellor John Healey 'doubled' a previously planned rise.
During his speech, Mr Healey spoke of a 'further 2%' for savers - and BBC Radio 4's Moneybox programme revealed that this came on top of an increase already outlined by his predecessor Rachel Reeves.
Tax rates explained
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 in savings interest tax-free each year, while additional rate taxpayers face tax on all savings interest.
Nevertheless, the Chancellor did raise tax rates, meaning those with particular levels of savings will experience the financial squeeze. From April 2027, the levy on savings income will rise to 24% for basic rate taxpayers, up from the previously scheduled increase of 22%.
What the changes mean
Presenter Paul Lewis said: "Income tax on the interest earned on savings is to rise by 4% from April. So it will be 24% at basic rate, 44% for the growing number of higher rate taxpayers and 49% for people with the highest incomes - just over £125,000 a year."
"That means for most people affected the Chancellor will snaffle nearly a quarter of the interest their savings earn. But how the Chancellor described the interest increase in his budget speech confused many."
Mr Lewis said the 'further 2% points' which the chancellor used last Wednesday confused some savers. He said: "Because those two percentage points are on top of the two percentage points already announced by his predecessor Rachel Reeves last year. Both start together next April."
He said the Treasury has confirmed the change will bring in £1 billion a year from savers.
Who is affected
Mr Lewis said: "This is a blow for people who have considerable income from savings. We've been having emails about it already."
Chartered financial planner Ray Black and founder of Money Minder said: "There is a starting block of a bright side. 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.
"So the people who have got savings of somewhere between £20-25,000 and they're getting top rates of somewhere between 3.5 to 4 per cent - they may not feel the pinch of this extra tax at all. However there is those people that have got more than £1,000 savings interest coming in and it's a 20 per cent increase for them."
Mr Lewis added: "The number of higher rate taxpayers has doubled to 8 million since the threshold freeze started in 2022. They'll be paying 44%. Is there a way of planning for it?"
Mr Black said: "First and foremost, you really need to understand how much interest you're making in the bank. So £20-£25,000 if the interest you're getting is under £1,000 per person." He recommended people utilise tax-free ISAs.
Janet told the show: "I get my money mainly from savings. My ex-husband gets his income from pensions. As a result of this budget for the same income I will be taxed at a 4% higher rate than he is." Mr Black described the outcome 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.'
Responding 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 pounds 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."
