Money saving expert Martin Lewis has warned savers they could face more tax following Rachel Reeves’ Budget on Wednesday. Savers who do not keep money in tax-free wrappers, such as ISAs, are set to see a tax hike on interest they earn if they cross the threshold.
Ms Reeves will increase the tax on savings interest by 2% across every bracket level, effective April 6, 2027. This means if your savings interest exceeds your personal allowance, a higher tax rate will apply. The personal savings allowance allows basic rate taxpayers to earn up to £1,000 in interest before paying tax, while higher rate taxpayers have a £500 allowance. Additional rate taxpayers receive no exemption. The new tax rates on cash savings will be 22% for basic rate taxpayers, 42% for higher rate payers and 47% for additional rate taxpayers.
Mr Lewis said: “An Additional 2% tax on savings (and property and dividends). So if you pay tax on savings (i.e. on interest above the personal savings allowance and outside of ISAs), the tax will rise to 22% from April 2027.
It’s not just savers who will receive a hike in taxes, either. Income from property and dividends will also be taxed at a higher rate. Just like savings rate increases, these taxes will rise by 2% in each bracket.
Ms Reeves told the Commons: “Currently, a landlord with an income of £25,000 will pay nearly £1,200 less in tax than their tenant with the same salary because no National Insurance is charged on property, dividend or savings income.
“It’s not fair that the tax system treats different types of income so differently, and so I will increase the basic and higher rate of tax on property, savings and dividend income by two percentage points, and the additional rate of tax on property and savings income by two percentage points.”
She added: “Even after these reforms, 90% of taxpayers will still pay no tax at all on their savings.”
To avoid the savings tax grab, you can put your savings into a Cash ISA. These are savings wrappers that you can earn tax-free interest on.
Before the budget, you could put up to £20,000 of savings into Cash ISAs a year, but that allowance is set to be slashed to £12,000 except for over-65s in 2027.
Martin Lewis slammed these changes and had advised against them in the interest of helping out savers. He said the reduction is “the wrong way” to get younger people investing, which Ms Reeves claims is the reason for lowering the limit.
Nigel Green of deVere Group said: “Many savers already face low real interest rates. With interest income now facing heavier taxation, returns after tax may be negligible or negative. For retirees or those relying on interest to preserve capital, this compounds the squeeze. When saving becomes unprofitable, people look elsewhere — and often overseas.”