A prominent financial expert has issued a stark warning to millions of UK savers, alerting them to a significant upcoming change that will leave household finances more exposed to taxation.
The Upcoming Savings Tax Increase
At present, basic-rate taxpayers benefit from a personal savings allowance of £1,000. This means the first £1,000 of interest earned on savings each year is completely tax-free. Any interest earned above this threshold is currently taxed at 20%.
However, this rate is set to climb. From April 2027, the tax charged on savings interest exceeding the allowance will increase to 22%. For context, with a top easy-access account paying around 4.5%, a basic-rate taxpayer would need a savings pot exceeding £22,000 to risk breaching their £1,000 allowance.
Higher and Additional Rate Taxpayers Hit Harder
The impact is more severe for those on higher incomes. Higher-rate taxpayers have a much smaller personal savings allowance of just £500. Their tax rate on interest above this will jump from 40% to 42% from April 2027.
Additional rate taxpayers, who currently pay 45% tax on all their savings interest, will see their rate escalate to 47%.
"There's a risk more people will be saving outside a tax-efficient environment and be exposed to this new tax rate," cautioned Sarah Coles, head of personal finance at Hargreaves Lansdown. "The personal savings allowance will still protect the first £1,000... but after that people will face a hike in their tax bill."
How to Protect Your Savings from Tax
The most effective shield against this rising tax burden is the Individual Savings Account (ISA). Interest earned within an ISA is completely free from income tax.
Currently, the overall annual ISA allowance stands at £20,000, which can be split across different types like Cash ISAs and Stocks & Shares ISAs. However, rules are changing for Cash ISAs specifically.
From April 2027, savers under the age of 65 will see the amount they can put into a cash ISA each year capped at £12,000. The overall £20,000 limit remains, so the balance could be placed into other ISA types. Those aged 65 and over will be unaffected by this new cap.
"It's going to be more important than ever to take advantage of cash ISAs, where all your savings are protected from tax," advised Coles. "The change to the cash ISA allowance will not happen overnight so there is still an opportunity to take advantage of your allowance this year."
With the tax landscape shifting, reviewing your savings strategy and maximising tax-efficient allowances is now a critical financial priority for UK households.
