Budget 2025: Savers Face a New Tax Hit: 2% Rise in Savings Interest Tax from 2027
03/12/2025
If you're someone who relies on savings interest to supplement your income, there's bad news on the horizon. In the recent UK Budget, Chancellor Rachel Reeves announced a 2% increase in the tax rate on savings income. This change, effective from April 2027, will make it more expensive for millions of savers to earn tax-free returns on their hard-earned cash.
The move is part of a broader set of tax adjustments aimed at filling a £22 billion "black hole" in public finances left by the previous government. While it might help fund public services like the NHS, it's a tough blow for retirees, investors, and anyone depending on interest from savings accounts, bonds, or ISAs.
What Does the Tax Hike Mean for You?
Currently, savings interest is taxed at the same rates as your income tax band, but after a tax-free allowance called the Personal Savings Allowance (PSA). Under the new rules:
- Basic rate taxpayers (those earning £12,571–£50,270 a year) will pay 22% on interest above the £1,000 PSA (up from 20%).
- Higher rate taxpayers (£50,271–£125,140) will pay 42% on interest over £500 (up from 40%).
- Additional rate taxpayers (over £125,140) will pay 47% on all interest (up from 45%), as they have no PSA.
To make it clearer, here's a simple comparison table:
| Tax Band | New Rate (From April 2027) | PSA (Tax Free Limit) |
| Basic Rate | 22% | £1,000 |
| Higher Rate | 42% | £500 |
| Additional Rate | 47% | £0 |
This isn't just a small tweak—it's a direct hit on your pocket. For example, if you're a basic rate taxpayer earning £1,500 in interest, you'd currently pay tax on £500 at 20% (£100). From 2027, that jumps to 22% (£110), costing you an extra £10. For higher earners or those with larger pots, the impact could run into hundreds or thousands of pounds annually.
Frozen Allowances: A Slow Squeeze on Savers
Adding insult to injury, the PSA thresholds won't rise with inflation or interest rates. The £1,000 for basic rate taxpayers and £500 for higher rate ones stay frozen, while additional rate payers get nothing. As savings rates remain elevated (thanks to the Bank of England base rate hovering around 5%), more people will breach these limits and start paying tax on their interest.
This freeze means the real value of your tax-free allowance erodes over time. What was once a generous buffer could soon feel like a pinch, especially if you're building a nest egg for retirement or supplementing a fixed income.
What Can Savers Do to Protect Themselves?
It's not all doom and gloom—there are steps you can take now to soften the blow:
- Max Out Tax-Free Options: Use your full £20,000 ISA allowance each year, but note the upcoming cap on cash ISAs at £12,000 from 2027 (unless you're over 65). Shift some savings into stocks and shares ISAs for potentially higher, tax-free growth.
- Shop Around for Rates: With interest rates still decent, lock in fixed-rate bonds or easy-access accounts before any potential cuts. Compare via sites like MoneySavingExpert.
- Review Your Portfolio: If you're in a higher tax band, consider premium bonds (tax-free prizes) or peer-to-peer lending, but weigh the risks.
- Plan Ahead: Use tools like the government's savings calculator to estimate your future tax bill. And keep an eye on Budget updates—things could evolve.
- Seek Advice: Chat with a financial advisor, especially if you're nearing retirement. They can help optimize your setup.
