A leading UK building society has issued a stark warning that millions of households face an unexpected tax hit on their savings due to government plans set for April 2027.
Two-Tier Tax System and Frozen Allowances
The core of the warning centres on a planned increase to the income tax rates applied to unearned income, such as savings interest. From April 2027, once a saver exceeds their tax-free Personal Savings Allowance (PSA), they will face a 2% increase across all income tax bands.
This creates a two-tier system where income from savings is taxed more heavily than earned income. For example, a basic rate taxpayer will see the tax rate on their interest jump from 20% to 22%.
The problem is compounded because the Personal Savings Allowance remains frozen. It currently lets basic rate taxpayers earn £1,000 in interest tax-free, while higher rate taxpayers have a £500 limit. With savings rates rising, many are now breaching this static threshold without realising.
Millions at Risk of Unexpected Tax Bills
The combination of higher interest rates, a fixed PSA, and the impending tax rise means a significant number of people will be drawn into paying tax on their savings inadvertently. Experts highlight that savers who are unaware of these changes could receive an unwelcome surprise from HM Revenue & Customs.
This warning follows the recent Autumn Budget, which also contained proposals to reduce the Cash ISA contribution limit for younger savers. Financial analysts argue that restricting access to tax-efficient products like ISAs will force more people into taxable savings accounts, exposing them directly to the 2027 tax hike.
Urgent Need to Utilise Tax-Free Products
In light of these changes, the importance of shielding savings from tax has never been greater. Cash ISAs are now a crucial financial tool, as all interest earned within them is protected from income tax, regardless of the saver's tax band or the amount of interest generated.
Savers are being urged to review their holdings and consider moving funds into tax-free wrappers to mitigate the impact of the forthcoming changes. With the policy shift set for 2027, acting now provides time to adjust financial strategies and protect hard-earned savings from the new, higher rates.
