How will the 2% increase in the tax rate affect my savings interest?

By Lucy Metcalf

Tax Partner

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It was announced in the Budget on 26 November 2025 that, from 6 April 2027, an extra 2% Income Tax will be due on any taxable savings income that you receive.

The first thing to note is that most people have an annual tax-free Personal Savings Allowance (PSA).

If you are a basic rate taxpayer, then your PSA is £1,000. This means that if, in a tax year, the total amount of interest you receive from your bank or building society accounts is less than £1,000, then you will not have to pay any Income Tax on your interest.

If you are a higher rate taxpayer, then your PSA is £500.

Additional rate taxpayers, who are those with income over £125,140, are not entitled to any PSA.

If you receive interest on your savings that exceeds your PSA, then the Income Tax rates in place now, and after 6 April 2027, are as follows:

	Rates in place up to 5 April 2027	Rates in place from 6 April 2027 onwards
Savings income that falls in the basic rate tax band	20%	22%
Savings income that falls in the higher rate tax band	40%	42%
Savings income that falls in the additional rate tax band	45%	47%

So, for example, if you are basic rate taxpayer and currently receive interest of £3,000 from your bank or building society accounts, your Income Tax liability on this would be as follows:

£1,000 x 0% =	£0	The first £1,000 is covered by the tax-free PSA
£2,000 x 20% =	£400	The balance is taxable at 20%
Total	£400

If a basic rate taxpayer received the same £3,000 interest in the 2027/28 tax year, then the Income Tax liability would be:

£1,000 x 0% =	£0	The first £1,000 is still covered by the tax-free PSA
£2,000 x 22% =	£440	The balance is taxable at 22%
Total	£440

So, the new tax rates from 6 April 2027 onwards would see a basic rate taxpayer have to pay an extra £40 tax on their savings interest.

If you are a higher rate taxpayer in receipt of £3,000 bank or building society interest, then your current Income Tax liability would be as follows:

£500 x 0% =	£0	The first £500 is covered by the tax-free PSA
£2,500 x 40% =	£1,000	The balance is taxable at 40%
Total	£1,000

From 6 April 2027 the Income Tax liability would be:

£500 x 0% =	£0	The first £500 is still covered by the tax-free PSA
£2,500 x 42% =	£1,050	The balance is taxable at 42%
Total	£1,050

So, the new tax rates from 6 April 2027 onwards would see a higher rate taxpayer have to pay an extra £50 tax on their savings interest.

An additional rate taxpayer, who is not entitled to a PSA, would see their tax rates on savings interest rise from 45% to 47%, so on £3,000 of interest, the Income Tax liability would go from £1,350 to £1,410, an increase of £60.

A few points to note are that interest earned on ISA accounts is not taxable and so would not be included in any of the above calculations or on Self Assessment tax returns.

Also, it is possible that, depending on your level of income, some of your taxable savings interest may fall in the basic rate tax band and some in the higher rate tax band, in which case your PSA will be restricted to £500 and you will suffer some Income Tax at the rate of 20% and some at the rate of 40%, rising to 22% and 42% from 6 April 2027 onwards.

Finally, tax legislation states that if your savings interest falls in the first £5,000 of your basic rate tax band, then you do not pay any Income Tax at all on this.

If you have any queries about how the increased tax rate on savings will impact you, or you would like to speak to one of our Independent Financial Advisers to make sure that your money is working the best it can for you, and any arising tax liability is minimised or eradicated completely, then please do not hesitate to give us a call on 01228 711888 or 01387 270340

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