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Chancellor to raise tax on savings
Income tax on savings interest will be higher than charged on regular income
The income tax you pay on savings interest will rise by two percentage points from April 2027, differentiating it from tax on earned income.
When you earn interest above a certain amount, it's subject to income tax. Previously, the thresholds for tax on savings interest were the same as those for other forms of income (in England, Wales and Northern Ireland), such as employment or a pension.
However, each threshold will now be two percentage points higher for savings interest than for other forms of income. For example, interest previously subjected to a 20% tax will be taxed at 22% from April 2027.
The changes have been announced alongside a curb on how much you can save tax-free in cash Isas, as well as higher tax rates on dividends and property income.
Read on to find out what it means for your savings.
How is savings interest currently taxed?
Money saved in a cash Isa is sheltered from tax. However, even when money is kept in an ordinary savings account, many people will pay no tax on the interest due to a number of different tax-free allowances.
The personal savings allowance lets basic rate taxpayers earn up to £1,000 a year in savings interest before paying tax, and higher-rate taxpayers earn up to £500.
Based on the highest interest rate paid by a widely available savings account today (4.4%), you'd need to have at least £22,728 saved as a basic-rate taxpayer to incur a bill. A higher-rate taxpayer would need £11,364.
Other allowances apply to those with low or no incomes, including the personal allowance and starting rate.
Only the money that you earn above these allowances is subject to tax.
- Find out more: Income tax calculator
How will tax rates on savings income change?
Here's how they look currently, and how they will change for savings interest:
| Tax bracket | 2025-26 rate | 2026-27 rate | 2027-28 rate |
|---|---|---|---|
| Basic rate (taxable income between £12,571 and £50,270) | 20% | 20% | 22% |
| Higher rate (taxable income between £50,271 and £125,140) | 40% | 40% | 42% |
| Additional rate (taxable income over £125,140) | 45% | 45% | 47% |
Note that the money earned from savings counts towards the tax bracket you're in.
This means you could end up having your personal savings allowance reduced, and pay different rates on your savings interest.
So, if you have a salary of £49,000 and earn £2,000 from savings interest, you will have earned £51,000, making you a higher-rate taxpayer with a £500 personal savings allowance.
You'd be charged basic rate (20%, increasing to 22%) on £770 of the interest, and the higher rate (40%, rising to 42%) on the remaining £730, leading to an overall tax bill of £446, rising to £476 in 2027.
Together with a similar tax hike on dividend and property income, the measures are expected to raise a total of £2.1bn for the Treasury.
How much could this cost me?
The average person in the UK has £16,067 in savings in 2025, according to data from Finder.
A top savings account paying 4.4% would earn you £707 interest on that amount. A basic-rate taxpayer with employment income of £30,000 would pay no tax on this thanks to the personal savings allowance, which lets basic-rate taxpayers earn up to £1,000 in savings interest tax-free.
However, a higher-rate taxpayer earning £60,000 in employment income and earning the same amount of interest would pay tax on it.
That's because the personal savings allowance for higher-rate taxpayers stands at £500. The remaining £207 of interest above this threshold would be taxed at the higher rate of income tax.
Currently, this is 40%, meaning a tax bill of £83. But from April 2027, this portion will be taxed at 42%, resulting in a slightly higher tax bill of £87 — a difference of £4.
- Find out more: Best savings accounts 2025
What about savings in Scotland?
The increased tax rates on savings will also apply in Scotland.
Scottish income is generally taxed at different rates than income in the rest of the UK. While England, Wales and Northern Ireland have three tax brackets, Scotland has six.
However, Scottish income tax rates do not apply to savings and dividend income.
How can I reduce my tax bill?
Those already maximising their cash Isa allowance (currently £20,000, but due to fall to £12,000 from April 2027 for under-65s) could consider premium bonds, which pay winnings tax-free.
However, it's worth noting that premium bonds don't pay any interest on the money you save. Based on your chances of winning a prize, the average amount earned is currently 3.6%. This is currently much lower than the interest on a top-paying savings account.
Ultimately, it's better to earn some interest and pay tax on it than to earn none.
With inflation standing at 3.6% in October, and not forecast to return to the Bank of England's 2% target until 2027, the value of savings in low-paying accounts is being sharply eroded.
Save on your tax bill
Members can use GoSimpleTax's tax calculator for £32.50 and avoid accountant fees
Get startedFinally...consider your pension
You could add the savings you can't fit into your Isas into your pension, to be withdrawn when you hit pension freedom age (55, rising to 57 in 2028). Look out for your annual allowance limit.
Although money from your pension is taxed when you withdraw it, it also benefits from tax relief on the way into your pension. Plus if properly invested it'll have time to grow tax-free and could substantially increase your wealth in retirement.
Bear in mind that if you've already drawn money from a defined contribution pension pot, you can only add £10,000 a year to your pension and still receive tax relief.
- Find out more: How much will I need to retire?
