Savers face a higher tax bill on interest after the Budget

From April 2027, tax rates on savings interest will rise by four percentage points. Here are the steps you can take to protect your cash.

From April 2027, savers in the highest income bracket will pay nearly 50% tax on interest earned from their savings, following Chancellor John Healey's tax increase.

Tax on savings income was due to rise by two percentage points in April. After Healey's 2026 Autumn Budget announcement, that increase will now be four percentage points.

In the 2027/28 tax year, savings tax rates will rise to 24% for basic rate taxpayers, 44% for higher rate taxpayers, and 49% for additional rate taxpayers.

People can still earn interest on savings held outside an ISA tax-free through the personal savings allowance.

Basic rate taxpayers receive an allowance of 1,000; higher rate taxpayers receive 500, while additional rate taxpayers receive nothing.

If your income is below 18,570, you may earn up to 5,000 in savings interest without paying tax under the starting rate for savings. The allowance falls by 1 for every 1 of non-savings income above 12,570.

Savings interest is taxable income. If it pushes your total earnings into a higher tax band, your personal savings allowance could shrink or disappear.

People with taxable incomes above 125,140 will feel the policy most sharply: interest from savings held outside a cash ISA will face tax at 49%.

At the Budget, Healey said that, even with the higher tax rates, "88% of people will pay no more tax on their savings."

Isabella Galliers-Pratt, senior investment director at wealth manager Rathbones, said raising tax on savings income makes keeping substantial cash deposits less appealing, especially for higher- and additional-rate taxpayers.

Cash still matters when immediate liquidity is needed. Beyond that point, though, the tax position changes the calculation: an additional-rate taxpayer paying 49% on taxable savings income would keep only 2.04% from a 4% savings rate.

For anyone with a large cash balance, the return they give up elsewhere will become harder to overlook.

The table below estimates the additional tax payable on savings interest once your tax-free savings allowances have been used, following next year's changes.

Swipe horizontally to scroll. Source: AJ Bell. The figures assume all interest shown is taxable, any available tax-free allowances have already been used, and the interest falls entirely within the stated band.

Cash ISA allowance changes axed

Tax rates on cash held outside an ISA are due to rise significantly. Cash savers did get some relief, though: chancellor John Healey reversed the previous government's unpopular ISA reforms.

The planned April 2027 cut to the annual cash ISA limit - from 20,000 to 12,000 for people under 65 - was scrapped by Healey at the Budget. The limit will remain 20,000. That figure covers the total yearly ISA allowance, which people can divide between different ISA types.

How to avoid paying tax on your savings interest

As tax rates rise on interest earned outside an ISA, using a tax wrapper for your savings will matter more to many people.

Here's how to reduce or avoid tax on the interest your savings earn.

Check your personal savings allowance

You can earn a certain amount of interest from non-ISA savings before paying tax, depending on your personal savings allowance.

Before opening or funding a savings account, estimate the interest your deposit could generate. That will show whether it is likely to exceed your tax-free allowance.

If the interest stays within your allowance, there is nothing you need to do because it will not be taxed.

Should the deposit earn more than your tax-free allowance, consider moving the money into a tax wrapper, if possible.

If your income is close to the next tax threshold, check whether interest from your savings could push you into a higher tax band and reduce your personal savings allowance.

Put the cash in an ISA.

Individual Savings Accounts (ISAs) give savers a powerful way to keep their money sheltered from tax.

Money held in an ISA can earn interest or investment returns without triggering income tax, capital gains tax, or dividend tax.

Jason Hollands, managing director at wealth manager Evelyn Partners, said that savers and investors should make full use of their ISA allowances, given the expected tax increases on cash savings and the capital gains and dividend tax rises already in place.

Each year, you can pay no more than 20,000 into ISAs. The full amount can go into one type, or you can split it between options such as an investment ISA and a cash ISA.

Using most of the allowance for cash savings leaves less available to shelter your investments from tax.

Hollands says you should assess how your wealth is divided between cash and investments.

Keeping some cash aside for emergencies makes sense. It can pay an unexpected bill without forcing you to sell investments when prices are down. Still, holding enough cash to cover several years of expenses may reduce the growth your investments could have earned over the long term.

Savings interest faces a much harsher tax treatment than investment gains or dividend income. Investments can lose value as well as gain it, though, so this option will not suit everyone.

Consider Premium Bonds

Premium Bonds are offered by National Savings and Investment (NS&I), a government-backed savings bank.

They do not pay guaranteed interest. Instead, each bond enters its holder into a monthly prize draw, with prizes ranging from 25 to 1 million.

For each 1 saved in Premium Bonds, you receive one entry in the monthly prize draw, with holdings capped at 50,000.

Any prizes are completely tax-free. However, because winners are chosen at random, your savings are not guaranteed to increase.

Consider options beyond cash

Many people favor cash savings because they are simple and feel safe. The amount you hold will not lose value, but inflation can gradually reduce what that money buys.

If your emergency fund already sits in an easy-access account and you want to avoid tax on the interest, you could consider other safe options with cash-like returns.

At Rathbones, Galliers-Pratt said investors with no immediate need for their money might consider short-dated, low-coupon gilts and other alternatives. Individual investors generally pay income tax on the coupon, but capital gains on gilts are usually exempt from capital gains tax.

Gilts are bonds issued by the UK government when it needs to borrow money. Investors can buy them.

Think of a gilt as an "IOU": you lend the government money, and it agrees to return it after a set period while paying a fixed interest rate known as the coupon.

"Some short-dated, low-coupon gilts currently deliver more than 4% after tax to an additional-rate taxpayer. With the 49% savings rate coming into force, a savings account would have to pay over 8% gross to match that return," says Galliers-Pratt.

The point isn't to tell people to stop using cash. It's to separate the money set aside for emergencies and near-term expenses from a large surplus that might earn more somewhere else.