Savers, including state pensioners, are set to face higher tax rates on savings income from April 2027, following confirmation in Wednesday's Budget. This marks the second consecutive year in which those trying to save will lose more money to the taxman.
Tax and financial planning firm Blevins Franks and Paragon Bank have both outlined how savings taxes will increase from April 2027. The policies were first introduced by former Chancellor Rachel Reeves but are due to come into force under new Chancellor John Healey and Prime Minister Andy Burnham, and were confirmed again in Wednesday's Budget documents.
What the tax changes mean
Blevins Franks explains: “The basic and upper rates of tax on dividend income increased by 2 percentage points from 6 April. A similar tax increase on savings income will take effect a year later [from April 2027].”
In April 2026, the savings income rate for dividends was increased for those on the basic tax rate and the higher tax rate, from 8.75% to 10.75% for those paying 20% tax, and from 33.75% to 35.75% for those on the higher rate.
From April 2027, the savings tax rate will increase for all savings, from 20% for a basic rate taxpayer to 22%. For 40% taxpayers (earning £50,270 or more), the rate increases from 40% to 42%, and for additional rate taxpayers (earning £125,140), the rate moves from 45% to 47%.
Impact on savers and pensioners
Savings tax applies to the interest on savings which sits outside your annual Personal Savings Allowance (PSA), the exact amount depending on your income.
Paragon Bank says that this tax rise could lead to tax increases for some households. It explains: “From April 2027, the tax rates applied to savings income outside of ISAs are set to increase.
“The savings basic rate will rise to 22%, the higher rate to 42%, and the savings additional rate to 47% for the 2027 to 2028 tax year. Despite these changes, the Personal Savings Allowance (PSA) is staying in place, this means:
“Basic-rate taxpayers can still earn up to £1,000 of savings interest each tax year, outside of an ISA, before tax may be due. Higher-rate taxpayers receive a £500 allowance, while additional-rate taxpayers do not receive a personal savings allowance.”
Costing this out, for those earning under £50,270, you usually have £1,000 PSA, which means you can earn £1,000 interest on savings tax-free. Then, anything above that threshold is taxed at 20%. From April 2027, that will be 22%. So, for example, for someone earning £2,000 of savings interest, a basic rate taxpayer faces a £200 bill on £1,000 of interest, which becomes £220.
This will apply to state pensioners too. Though state pensioners and everyone over 65 will retain their full £20,000 Cash ISA limit, any savings generating in excess of £1,000 interest outside of an ISA will be liable to tax. There are some instances where a pensioner can save more than this without tax, for example a state pensioner on a low income could use the Starting Rate for Savings to generate as much as £5,000 of tax-free savings interest. But other state pensioners who are still working or still receiving a larger income, such as through savings, investments or property income, will not be able to use this allowance.
Advice for savers
Paragon Bank adds: “A practical first step is to check your latest savings statements and estimate how much interest you expect to earn over the tax year. If it looks likely to exceed your allowance, you may want to consider moving some of your savings into a cash ISA, where interest is tax-free. Paragon’s range of ISAs is also flexible, so any withdrawals can be replaced within the same tax year without affecting your annual ISA allowance.”
Blevins Franks also sets out recommendations for savers. It adds: “Now is the time to make sensible adjustments over the coming months so you are well-placed for the significant reforms arriving in April 2027 and beyond. Given the breadth of UK tax changes over recent years and the complexity they introduce, obtaining personalised, professional guidance is increasingly important. Understanding how the reforms apply to your situation, and how best to position your assets, can help you avoid unnecessary tax exposure and protect your family’s long-term interests.”
