UK Savers Face Higher Tax on Interest From 2027: Allowances and Options
Budgeting & Saving Daniel Hilton 703 reads
Savings interest tax rates are due to rise in 2027/28. See how allowances, ISAs and other choices could affect your cash.
The biggest change for UK savers is scheduled for the 2027/28 tax year: interest earned outside tax-free allowances will face higher rates. The increase makes it more important to check how much interest your cash may generate, while keeping enough accessible savings for near-term needs.
What the new rates mean
Savings tax rates are due to rise by four percentage points from 2026/27 to 2027/28. The rates will be 24% for basic rate taxpayers, 44% for higher rate taxpayers and 49% for additional rate taxpayers. People whose income is below the personal allowance threshold of £12,571 remain at 0% in the table below.
| Income tax band | 2026/27 savings rate | 2027/28 savings rate |
|---|---|---|
| Under £12,571 | 0% | 0% |
| £12,571 to £50,270 | 20% | 24% |
| £50,271 to £125,140 | 40% | 44% |
| Over £125,140 | 45% | 49% |
These rates apply to savings interest that exceeds the relevant tax-free allowances. For example, once those allowances have been used, £1,000 of taxable interest would mean £240 tax at the basic rate in 2027/28, compared with £200 in 2026/27. At the higher rate, tax on £5,000 would rise from £2,000 to £2,200; at the additional rate, it would rise from £2,250 to £2,450.
For all three tax bands, the increase is £40 on £1,000 of taxable interest, £200 on £5,000 and £600 on £15,000. These examples assume the full amount falls within the stated band and that tax-free allowances have already been used.
Allowances can change the calculation
The personal savings allowance lets basic rate taxpayers receive up to £1,000 of savings interest tax-free outside an ISA. The allowance is £500 for higher rate taxpayers, while additional rate taxpayers have no personal savings allowance.
Some people with lower incomes may also qualify for the starting rate for savings. Those with income below £18,570 can receive up to £5,000 of savings interest tax-free under this allowance. It falls by £1 for every £1 of non-savings income above £12,570, so the amount available depends on other income.
Interest counts towards taxable income. That means a larger-than-expected interest payment could push someone into a higher income band and reduce or remove their personal savings allowance. If your income is close to a threshold, include estimated interest when working out which allowance may apply.
At the 2026 Budget, Chancellor John Healey said 88% of people would pay no more tax on their savings. The higher rates will have a more direct effect on people with taxable interest above their available allowances, especially additional rate taxpayers. Rathbones investment director Isabella Galliers-Pratt illustrated the impact: a 4% savings rate would leave an additional rate taxpayer with 2.04% after tax once the 49% rate applies.
The cash ISA limit stays at £20,000
The planned reduction in the annual cash ISA limit for people under 65 has been reversed. Instead of falling from £20,000 to £12,000 from April 2027, the limit is set to remain at £20,000. That is the overall annual ISA allowance, which can be divided among different types of ISA.
Interest earned inside a cash ISA is exempt from income tax. ISAs can also hold investments, with investment growth exempt from income tax, capital gains tax and dividend tax. The trade-off is that using more of the annual allowance for cash leaves less room for investments within an ISA.
Review cash needs before choosing an option
Start by estimating the interest your non-ISA savings may earn, then compare it with your personal savings allowance and any starting rate for savings you qualify for. If expected interest is within the available allowance, no further step may be needed. If it exceeds the allowance, an ISA may be one option, subject to the annual limit and your other savings goals.
A cash reserve for emergencies and near-term spending can help cover unexpected bills without requiring you to sell investments. But holding substantial cash for several years has a cost: interest above allowances may be taxed, and inflation can reduce what the money buys. Investments may offer the possibility of longer-term growth, but their value can fall as well as rise, so they aren’t suitable for everyone.
Other choices have different risks
Premium Bonds, offered by National Savings and Investments, don’t pay a guaranteed interest rate. Instead, each £1 held gives one entry into monthly prize draws, with prizes ranging from £25 to £1 million. A person can hold up to £50,000, and prizes are tax-free. Because the outcome is random, there is no guarantee of winning or growing the money.
For money that won’t be needed immediately, Galliers-Pratt points to short-dated, low-coupon gilts as another possibility. A gilt is a UK government bond with a stated repayment date and coupon, or interest payment. The coupon is subject to income tax, while capital gains on gilts are generally free from capital gains tax for individual investors.
Galliers-Pratt said some short-dated, low-coupon gilts at current yields could provide a post-tax return above 4% for an additional rate taxpayer. On that comparison, a savings account would need to pay more than 8% before tax to match the return after the 49% savings rate takes effect. These figures describe the comparison in the source; actual outcomes depend on the gilt and the investor’s circumstances.
The practical distinction is between cash for emergencies or upcoming expenses and money that can be set aside for longer. Review the allowances and tax treatment for each option, then weigh access, certainty and risk before deciding where each part of your savings belongs.
