UK households have been alerted that the tax rate on savings interest is set to rise from April 2027. Currently, basic-rate taxpayers can earn up to £1,000 in savings interest annually before they are required to pay tax, under what is known as the personal savings allowance.
The existing tax rate stands at 20% on savings interest exceeding this amount, but this will climb to 22%. Tax is payable on any savings interest earned above this threshold.
If you were to deposit your money into the highest rate easy-access savings account currently available, offering around 4.5%, you would need to save more than £22,000 for a year to risk exceeding your savings allowance.
However, the limit is significantly lower for higher-rate taxpayers, who are taxed at 40% when their savings interest exceeds £500 per annum. This rate will increase to 42% from April 2027.
Additional rate taxpayers are currently taxed at 45% on all their savings interest, a figure set to rise to 47%, reports Birmingham Live.
Savings interest accrued in an ISA remains tax-free. At present, you can save up to £20,000 each tax year across any ISA accounts you hold.
Certain ISAs have lower limits – for instance, only £4,000 can be saved into a Lifetime ISA each tax year. However, from April 2027, the Chancellor has declared that savers under 65 will only be able to deposit £12,000 each tax year into a cash ISA.
The overall ISA limit of £20,000 will remain unchanged – meaning, for example, you could save £12,000 into a cash ISA and £8,000 into a stocks and shares ISA.
The new cap will not impact over-65s, who will continue to be able to deposit up to £20,000 each tax year into a cash ISA as usual.
The primary types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs. There is also a version for children known as Junior ISAs.
Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, warned: “There’s a risk more people will be saving outside a tax-efficient environment and be exposed to this new tax rate.
“The personal savings allowance will still protect the first £1,000 of savings interest for basic rate taxpayers and £500 of interest for higher rate taxpayer, but after that people will face a hike in their tax bill.”
She added: “It’s going to be more important than ever to take advantage of cash ISAs, where all your savings are protected from tax. 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.”
