Millions of savers are being warned they could face a bigger tax bill from next April as experts highlight a fresh “tax trap” that could leave more of their hard-earned interest heading to HMRC.
Financial experts warn that higher taxes on savings interest, coupled with a cut to the annual cash ISA allowance, will make tax-free accounts even more valuable for protecting long-term wealth. From April next year, the tax paid on savings interest is due to rise by 2 percentage points, taking the rate to 22% for basic-rate taxpayers, 42% for higher-rate taxpayers, and 47% for additional-rate taxpayers.
At the same time, the Government is set to reduce the amount under-65s can put into a cash ISA each year from £20,000 to £12,000, limiting the opportunity to shelter savings from the taxman.
The warning comes as official figures show the Treasury is already collecting record sums from savers. HM Revenue & Customs says tax paid on savings income has surged from £2bn in 2022/23 to £8.4bn in 2025/26, as rising interest rates and frozen tax thresholds have dragged more people into paying tax.
Sean McCann, chartered financial planner at NFU Mutual, said the latest changes mean savers need to think carefully about where they keep their money.
He said: “Increases in taxation mean that the protection offered by ISAs is more important than ever, as returns that would have been lost in tax remain invested and can compound over time.
“As incomes rise and allowances remain frozen, an increasing number of people are being dragged into higher tax bands. The increase in tax on savings interest from April will mean that many will find themselves paying up to 47% tax on their savings interest.”
Cash savings can quickly become taxable
Many savers assume they pay no tax on interest because of the personal savings allowance. Basic-rate taxpayers can currently earn up to £1,000 in savings interest tax-free each year, while higher-rate taxpayers receive a £500 allowance. Additional-rate taxpayers receive no allowance.
That means someone with £25,000 earning 4% interest generates £1,000 a year in interest – enough to use the entire allowance for a basic-rate taxpayer. A higher-rate taxpayer would use up their allowance with savings of just £12,500 earning the same rate. Money held inside a cash ISA remains free of income tax regardless of how much interest it earns.
Investors face a growing tax squeeze
The pressure is not confined to cash savers. People holding shares or investment funds outside an ISA receive a dividend allowance of just £500 a year. Dividend tax rates for basic and higher-rate taxpayers rose by 2 percentage points earlier this year to 10.75% and 35.75%, while additional-rate taxpayers pay 39.35%.
Meanwhile, the capital gains tax annual exemption has been slashed to £3,000, down from £12,300 before April 2023. Gains above the allowance are taxed at 18% if they fall within the basic-rate band and 24% above that. Mr McCann said ISAs also help savers avoid other hidden tax pitfalls.
He added: “ISAs can help avoid a number of different “tax traps”. Income from savings and investments held outside an ISA is included when calculating the Child Benefit tax charge and, for those with income over £100,000, it also contributes to the erosion of the tax-free personal allowance, whereas income from ISAs is not included.
“The extra 2% tax on savings interest from next April is the latest in a wave of tax increases endured by savers and investors over recent years, including the hike in dividend tax earlier this year and the increase in capital gains tax rates. The fear is that the new Prime Minister will seek to increase the amount of tax raised from savings and investments still further.”
