The Budget has increased the tax rates on savings interest to 24%, 44% and 49% from April 2027. But millions of savers will still pay nothing because tax-free savings allowances remain, while interest earned inside an ISA stays outside the tax net.
Savers have been handed an unwelcome Budget surprise: the tax charged on taxable savings interest is going up again.
From 6 April 2027, a basic-rate taxpayer who has used up their tax-free savings allowances will pay 24% tax on savings interest, rather than the 20% rate that applies today.
Higher-rate taxpayers will face 44%, up from 40%, while additional-rate taxpayers will pay 49%, up from 45%.
In other words, compared with the rates savers pay today, the tax on taxable savings interest will be four percentage points higher.
But that doesn’t mean everyone with money in a savings account will suddenly receive a tax bill.
Far from it.
The important question for most people isn’t simply “what is the new savings tax rate?” It is whether enough interest is being earned to pay any tax at all.
How much savings interest can you earn tax free?
Most savers have a Personal Savings Allowance before tax becomes due.
A basic-rate taxpayer can currently receive up to £1,000 of savings interest each tax year without paying tax on it.
A higher-rate taxpayer can receive up to £500.
Additional-rate taxpayers don’t receive a Personal Savings Allowance.
The Budget leaves those allowances unchanged for 2027/28.
“The headline tax rise sounds dramatic, but the first thing savers should establish is whether they will actually pay it. For many people the Personal Savings Allowance will continue to cover all of the interest they receive.”
Gary Moran, Chief Executive, Wessex Community BankHow much can you have in savings before paying tax?
There isn’t one fixed savings balance at which tax suddenly starts.
What matters is the interest earned, not simply how much money is sitting in the account.
As a simple example, if a savings account paid 4% interest for a full year, a basic-rate taxpayer would need around £25,000 in taxable savings to generate £1,000 of interest.
At the same 4% rate, a higher-rate taxpayer would generate their £500 Personal Savings Allowance from around £12,500.
Those figures are only illustrations. Interest rates change, money may move during the year and interest from different taxable accounts is added together.
What are the new savings tax rates from April 2027?
The Budget 2026 sets the following rates for taxable savings income from 6 April 2027:
- Basic savings rate: 24%, compared with 20% today.
- Higher savings rate: 44%, compared with 40% today.
- Additional savings rate: 49%, compared with 45% today.
The new savings rates apply across the UK.
They are separate from the ordinary rates applied to employment income. The main basic, higher and additional Income Tax rates on wages remain 20%, 40% and 45% in England, Wales and Northern Ireland.
What does the savings tax rise actually cost?
The increase only affects interest that remains taxable after any allowances have been used.
Take a basic-rate taxpayer receiving £1,500 of taxable savings interest in a year.
Their first £1,000 would be covered by the Personal Savings Allowance, leaving £500 taxable.
At today's 20% rate, the tax on that £500 would be £100.
At the new 24% savings rate, it would be £120.
The Budget change would therefore cost that saver an extra £20 a year.
Someone with much larger taxable savings income would see a larger increase.
Can a Cash ISA avoid tax on savings interest?
Yes.
Interest earned inside an Individual Savings Account is tax free and doesn’t use up your Personal Savings Allowance.
That means the higher savings tax rates make the tax protection offered by an ISA potentially more valuable, particularly for people with larger cash balances or those who already exceed their Personal Savings Allowance.
There was also an important Budget reversal.
The government had previously planned to restrict how much some adults could put into Cash ISAs from April 2027. That reduction has now been abandoned.
The £20,000 annual Cash ISA limit will remain from 6 April 2027.
Does that mean everyone should move their savings into an ISA?
Not automatically.
Tax is only one part of the decision.
A taxable savings account paying a significantly better interest rate can still leave somebody better off than a lower-paying ISA, particularly where their interest remains within the Personal Savings Allowance.
For someone who isn’t going to exceed their tax-free allowance, putting money into an ISA purely because it says “tax free” may make little difference to their immediate tax bill.
But ISAs can become increasingly useful as savings grow.
Money already held inside the ISA remains sheltered from tax, so someone building savings over several years may value that protection even if they aren’t currently paying tax on their interest.
Lower-income savers may have an extra tax-free allowance
The Personal Savings Allowance isn’t the only protection available.
People with relatively low non-savings income may also qualify for the starting rate for savings.
That can provide up to another £5,000 of savings interest at 0%, although the amount available reduces as other taxable income rises.
Someone whose wages, pension or other non-savings income is £17,570 or more will normally have no starting-rate band left.
This means two people with exactly the same amount in the bank can face completely different tax bills depending on their other income.
How does HMRC know how much savings interest you earned?
Savers don’t generally need to send HMRC a list of ordinary UK bank accounts simply because they have earned interest.
Banks, building societies and credit unions report the interest they pay to HMRC after the end of the tax year.
If tax is due, HMRC can often collect it by adjusting an employee's or pensioner's tax code. People who already complete Self Assessment normally report taxable interest through their return.
Interest from different taxable savings accounts is added together when working out whether an allowance has been exceeded.
Why the Budget could make ISAs more important
For years, relatively low interest rates meant many ordinary savers were nowhere near their Personal Savings Allowance.
Higher savings rates changed that calculation.
When accounts pay 4% or more, considerably smaller balances can generate £500 or £1,000 of annual interest.
Raising the tax rate on anything above those allowances gives savers another reason to understand exactly where their money is held and what interest it is generating.
“People shouldn’t make a savings decision based on tax alone. Start with the interest rate, access to your money and whether you are actually likely to exceed your tax-free allowance. But as savings balances grow, using an ISA allowance can become increasingly valuable.”
Gary Moran, Chief Executive, Wessex Community BankWhat should savers check before April 2027?
There is no need for most people to make a rushed decision, but the Budget makes a few checks worthwhile.
- Work out roughly how much interest you earn each year across all taxable savings accounts.
- Check your Personal Savings Allowance based on your Income Tax band.
- Remember that ISA interest is tax free and doesn’t count towards the Personal Savings Allowance.
- Compare interest rates as well as tax treatment before moving money.
- Consider future savings as well as today's balance, because an ISA can protect interest over many years.
Will most people actually pay more tax on their savings?
Probably not.
The Chancellor said in her Budget speech that 88% of people will pay no more tax on their savings.
That is largely because many people either earn less interest than their tax-free allowance or hold savings within tax-free products such as ISAs.
But the change will matter more to people with larger taxable savings balances, higher interest income or no Personal Savings Allowance.
And that is the slightly odd outcome of the Budget.
The government is taking a larger share of taxable savings interest while simultaneously preserving one of the main ways savers can legally keep that interest outside the tax system.
For many households, the question therefore won’t simply be whether to save.
It will increasingly be where to save it.