A senior finance figure in the industry has warned savers about changes that could well affect them once the new rules take effect
UK households have been alerted to an upcmoming increase in the tax rate on savings interest. Currently, basic-rate taxpayers can earn up to £1,000 in savings interest annually before they are required to pay tax, a benefit known as your personal savings allowance.
The existing tax rate is 20% on savings interest exceeding this amount, but this will rise to 22%. Tax is payable on any savings interest earned above this threshold. If you were to deposit your money in the current top rate easy-access savings account, offering around 4.5%, you would need to save more than £22,000 for one year to risk exceeding your savings allowance.
However, the limit is significantly lower for higher-rate taxpayers, who are taxed at 40% when their savings interest exceeds £500 per annum. This rate will increase to 42% from April 2027. Additional rate taxpayers currently pay 45% tax on all their savings interest, which will escalate to 47%, reports Birmingham Live.
Savings interest accrued in an ISA is not subject to tax. At present, you can save up to £20,000 each tax year across any ISA accounts you hold.
Some ISAs have lower limits – for instance, only £4,000 can be saved into a Lifetime ISA each tax year. However, from April 2027, the Chancellor has announced that savers under 65 will only be able to deposit £12,000 each tax year into a cash ISA.
The overall £20,000 ISA limit will remain unchanged – meaning, for example, you could save £12,000 into a cash ISA and £8,000 into a stocks and shares ISA. Those aged over 65 won’t be impacted by the new cap and will continue to be able to save up to £20,000 annually into a cash ISA as usual.
The primary types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs. Young people have their own variant known as Junior ISAs.
Sarah Coles, head of personal finance at Hargreaves Lansdown, warned: “There’s a risk more people will be saving outside a tax-efficient environment and be exposed to this new tax rate. The personal savings allowance will still protect the first £1,000 of savings interest for basic rate taxpayers and £500 of interest for higher rate taxpayer, but after that people will face a hike in their tax bill.
“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.”
