The Treasury’s reforms, which also reshape the rules around cash ISAs, mark one of the most significant adjustments to personal savings taxation in recent years. While the changes aim to boost government revenues, they are expected to affect a wide range of savers, particularly those relying on interest income amid a period of relatively high savings rates.
Higher Tax Rates and Reduced Flexibility for Savers
Currently, basic-rate taxpayers can earn up to £1,000 in interest each year before paying tax, thanks to what is known as the personal savings allowance. Once this limit is exceeded, a 20 percent tax applies to additional savings income. According to Birmingham Live, from April 2027, this rate will increase to 22 percent.
Those paying the higher rate of income tax, who are entitled to a smaller personal savings allowance of £500, will see their savings tax rate climb from 40 percent to 42 percent. Additional rate taxpayers, who currently pay 45 percent on all interest earned, will face a two-point rise to 47 percent under the same changes.
To illustrate, a saver depositing their money into a leading easy-access account, currently offering about 4.5 percent interest, would need to hold over £22,000 for a full year to exceed the £1,000 allowance for basic-rate taxpayers. Although the majority of savers remain below this threshold, the gradual increase in rates could erode returns, especially for those with larger deposits outside of tax-free accounts.
Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, warned that the new structure could leave more people “saving outside a tax-efficient environment” and becoming “exposed to this new tax rate.” According to her, while the personal savings allowance still provides a limited shield, “after that, people will face a hike in their tax bill.”
New Limits for Cash ISAS and Their Long-Term Impact
Interest earned on savings held within an Individual Savings Account (ISA) remains tax-free. At present, savers can deposit up to £20,000 each tax year across different ISA types, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs. However, new restrictions will apply from April 2027 for savers under the age of 65.
According to the same report, the Chancellor has confirmed that those under 65 will be allowed to place only up to £12,000 each year into a cash ISA. While the overall ISA limit of £20,000 will remain unchanged, this means younger savers will have to distribute their savings differently, such as allocating £12,000 to a cash ISA and £8,000 to a stocks and shares ISA.
The adjustment does not affect those aged over 65, who will continue to enjoy the existing £20,000 annual limit for cash ISAs. Meanwhile, the Lifetime ISA cap will stay at £4,000 per tax year, and the Junior ISA will continue to offer a separate savings vehicle for children.
Financial experts stress that the transition will not occur overnight, giving savers time to optimise their holdings before 2027. As Sarah Coles noted, “It’s going to be more important than ever to take advantage of cash ISAs, where all your savings are protected from tax.” While the Treasury has yet to publish detailed guidance on the implementation of these changes, the message is clear: savers who fail to adjust their portfolios before the new rules arrive may find themselves paying more tax on their hard-earned interest income.
