Budget 2025: Tax on Savings interest increased by 2%

How the 2% Rise Affects Your Savings

Savings Interest Tax to Rise from April 2027

The Autumn Budget 2025 confirmed that tax on savings interest will rise by 2 percentage points across all tax bands from April 2027. In practice, this means basic-rate savers will pay 22% on interest (up from 20%), higher-rate savers 42% (up from 40%) and additional-rate savers 47% (from 45%). The personal savings allowance (PSA) remains £1,000 for basic-rate and £500 for higher-rate taxpayers, with no PSA for additional-rate taxpayers. However, because income tax thresholds are frozen, these allowances will lose value over time. In short, ordinary savers earning interest outside tax-free wrappers will face higher bills on their savings income.

New tax rates on savings interest

22% Savings Tax for Basic-Rate Taxpayers

Basic-rate taxpayers: Tax on savings interest (outside an ISA) rises to 22% (from 20%) from April 2027.

Higher-rate taxpayers: The rate jumps to 42% (from 40%).

Additional-rate taxpayers: The rate goes to 47% (from 45%).

Tax-free allowances: The PSA stays at £1,000 (basic) or £500 (higher), unchanged from today.

Higher Taxes on Investment Income

These measures are expected to boost Treasury receipts by about £525m in 2028–29. Overall, the Budget’s approach is to “narrow the gap” between tax on earned income and income from assets. In fact, the new rates on savings interest mirror identical 2% rises on dividend and property income, reflecting the government’s aim to tax investment income more like wages. Together with dividend tax hikes (taking effect April 2026) and a new higher property income tax, savers and investors are facing steeper taxes on passive income

Impact on savers

Rising Tax Burden on Savings Income

These changes hit anyone relying on interest income. Analysts warn that, alongside frozen thresholds and cuts to tax-free ISA allowances, this creates a “triple whammy” for savers. In one sense, most people already pay little or no tax on modest savings due to the PSA. For example, current data suggest a typical saver with around £16,000 in cash would pay only a few pounds more tax under the new rules. But the principle is that all interest earned outside a tax shelter will now face a higher levy. With £525m more revenue expected by 2028–29, millions of savers will see their take-home interest income shrink

Getting ahead of these changes is crucial. Interest on money inside a cash ISA remains completely tax-free, so using your ISA allowance is now even more valuable. (Note that the annual cash ISA limit itself will be cut from £20,000 to £12,000 from April 2027.) Meanwhile, keep in mind the unchanged PSA thresholds: as your income grows into higher bands, your tax-free savings allowance can be reduced, pushing more of your interest into taxable territory.

Protecting your savings

Strategies to Safeguard Your Savings

Maximise tax-free wrappers: Any savings inside ISAs or pensions escape the higher savings tax. Use your ISA or pension allowances first.

Review interest income: Check whether your total income will trigger the higher rates. Even small amounts of extra interest could push you into a higher tax band on that interest.

Plan for frozen thresholds: With personal tax bands frozen to 2031, consider investing to grow wealth tax-efficiently instead of holding large cash balances.

Seek expert advice: For personalised guidance on these changes, get in touch with Naail & Co to book a free initial consultation. Our chartered tax advisors can help you understand the new tax on savings interest rules and structure your savings in the most tax-efficient way possible.

How Savers Can Prepare

These measures mean savers must be proactive. By reviewing your savings strategy now and using every available allowance, you can help mitigate the impact of the higher tax on savings interest. Get in touch with Naail & Co to discuss how these Budget 2025 changes affect you and to plan ahead.

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FAQs on tax on savings interest

As of now, basic rate taxpayers pay 20% tax on savings interest above the Personal Savings Allowance (PSA), higher rate taxpayers pay 40%, and additional rate taxpayers pay 45%. These rates will increase by 2% from April 2027 under the latest Budget 2025 announcement

From April 2027, the tax on savings interest will rise by 2 percentage points across all bands. Basic rate taxpayers will pay 22%, higher rate taxpayers 42%, and additional rate taxpayers 47% on interest income above their respective PSAs.

The Personal Savings Allowance (PSA) lets basic rate taxpayers earn up to £1,000 in savings interest tax-free and higher rate taxpayers up to £500. There is no PSA for additional rate taxpayers. These thresholds are frozen and will remain unchanged, meaning more savers could see a portion of their interest taxed over time.

The increase in tax on savings interest will impact individuals who rely on interest income from savings outside of tax-free wrappers like ISAs. Higher earners and those with large cash reserves in regular savings accounts are particularly likely to feel the effect.

To reduce exposure to the rising tax on savings interest, consider using your full ISA allowance, which protects interest income from tax. Reviewing your income, savings structure, and available tax-free allowances can also help mitigate the impact. Naail & Co can support you in creating a tax-efficient savings strategy.

No. Interest earned in Individual Savings Accounts (ISAs) remains completely tax-free and is not subject to the increased tax on savings interest. Using your ISA allowance is now more important than ever.

The increase is part of a broader strategy to align tax on investment income—such as interest, dividends, and rental income—with earned income. This measure is expected to raise over £8bn by 2030–31, including £525m in 2028–29 from tax on savings interest alone.

Yes. The changes are complex and can significantly affect your financial planning. Speaking with a tax advisor can help you navigate the rising tax on savings interest and make the most of available tax reliefs. Get in touch with Naail & Co to book a free initial consultation.