Millions of savers across the United Kingdom have been issued a stark warning about upcoming changes to the tax they pay on interest earned from their nest eggs. From April 2027, the government will increase the rate of tax applied to savings interest that exceeds annual tax-free allowances.
Understanding the Personal Savings Allowance and Upcoming Tax Hike
Currently, basic-rate taxpayers benefit from a £1,000 personal savings allowance, meaning they can earn up to this amount in savings interest each year before any tax is due. Any interest earned above this threshold is taxed at 20%. However, from April 2027, this rate will climb to 22%.
The situation is more acute for higher-rate taxpayers. Their personal savings allowance is just £500, with interest above this sum taxed at 40%. This higher rate of tax is also set to rise, increasing to 42% from the same date. Additional-rate taxpayers, who currently pay 45% tax on all their savings interest, will see their rate jump to 47%.
To illustrate, with a top easy-access savings account paying around 4.5%, a basic-rate taxpayer would need a savings pot exceeding £22,000 to risk breaching their £1,000 allowance under current rules.
Major Changes to Cash ISA Allowances for Under-65s
In a parallel move that will significantly impact tax-efficient saving strategies, the Chancellor has announced a new cap on Cash ISAs. From April 2027, savers under the age of 65 will see their annual Cash ISA allowance reduced to £12,000.
It is crucial to note that the overall £20,000 annual ISA subscription limit remains unchanged. This means individuals can still save up to £20,000 across different ISA types. For example, one could invest £12,000 in a Cash ISA and the remaining £8,000 in a Stocks and Shares ISA within the same tax year.
Savers aged 65 and over will be exempt from this new cap and can continue to subscribe up to the full £20,000 into a Cash ISA as normal. Other ISA types, such as Lifetime ISAs (with their existing £4,000 limit), Stocks and Shares ISAs, and Innovative Finance ISAs, will continue to be available.
Expert Advice: Act Now to Shield Your Savings
Financial experts are urging the public to review their savings arrangements in light of the forthcoming changes. Sarah Coles, head of personal finance at Hargreaves Lansdown, highlighted the risks: “There’s a risk more people will be saving outside a tax-efficient environment and be exposed to this new tax rate.”
While the personal savings allowance will still offer some protection, Coles emphasised the growing importance of ISAs. “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,” she advised.
The key takeaways for UK savers are clear: tax on savings interest is rising, and access to tax-free Cash ISA savings is being curtailed for those under 65. Proactive financial planning, including maximising current ISA allowances, is now essential to mitigate the impact of these changes on future returns.
