Chancellor Rachel Reeves has announced an increased tax on savings and personal finance expert has explained when people will pay
Martin Lewis this afternoon issued a warning to all savers – and said people could end up paying more tax after today’s Budget. Chancellor Rachel Reeves this afternoon announced that anyone who crossed the threshold will pay more tax in the November Budget.
In documents released for the Budget the Treasury confirmed tax rates on savings income will be increased by 2 per cent at the basic, higher and additional rate from 6 April 2027 and the Starting Rate of Savings limit will be maintained at £5,000 from April 2026 to April 2031
Mr Lewis said: “Additional 2% tax on savings (and property and dividends)T. So if you pay tax on savings (ie more interest above the personal savings allowance and outside of ISAs) the tax will rise to 22% from April 2027.”
Tax rates on property, savings and dividend income will rise by two percentage points, Chancellor Rachel Reeves said. She told the Commons: “Currently, a landlord with an income of £25,000 will pay nearly £1,200 less in tax than their tenant with the same salary because no National Insurance is charged on property, dividend or savings income.
“It’s not fair that the tax system treats different types of income so differently and so I will increase the basic and higher rate of tax on property, savings and dividend income by two percentage points, and the additional rate of tax on property and savings income by two percentage points. Even after these reforms, 90% of taxpayers will still pay no tax at all on their savings.”
Mike Salem, UK Country Associate at the Consumer Choice Centre said: ““Consumers are being asked to shoulder higher taxes while receiving almost nothing in return. Freezing thresholds and cutting savings freedoms punishes responsible financial behaviour and leaves families with less flexibility at a time when they need it most.”
Nigel Green of deVere Group said the Treasury’s new tables show that from 2027 savers and landlords will face a straight rate increase of two percentage points across interest, rental and dividend income. For basic, higher and additional-rate taxpayers this pushes tax on saving income to 22, 42 and 47%.
Mr Green said: “The government says it wants to rebuild the pension and savings culture, yet it imposes fresh barriers on anyone who actually saves or invests. That sends a simple message that locked-up capital is subject to stealth extraction. Why would someone tie money into UK equities under those rules when other markets reward income rather than punish it?”
“Many savers already face low real interest rates. With interest income now facing heavier taxation, returns after tax may be negligible or negative. For retirees or those relying on interest to preserve capital, this compounds the squeeze. When saving becomes unprofitable, people look elsewhere — and often overseas.”
Mr Lewis has previously explained how savings tax works and how two crucial limits – £10,000 and £20,000 – that individuals need to keep in mind, depending on their income levels.
Mr Lewis addressed a query regarding the personal savings allowance and whether it was supplementary to the personal allowance of £12,570. The individual also enquired about a £5,000 allowance.
Personal Allowance
He explained: “That is the amount that you can earn from any source, not just savings interest, pensions, from work, from anything tax-free each year, and it’s typically £12,570. If you earn above that, you pay 20 per cent tax on the next amount, any earnings above it.
“Until around £50,000, above that, it’s 40 per cent tax until around £125,000, above that, it’s the top rate of 45 per cent tax. There is a slight quirk that once you start earning £100,000 you begin to lose your personal allowance. But for most people, you can earn £12,570 from any source tax free.
“Now, there is also a specific personal savings allowance, and this is only for money earned from savings interest. Remember, you don’t get taxed on your savings, it’s only the interest your savings earn that are taxable.”
Personal Savings Allowance
Mr Lewis explained: “What you get depends on what rate of income tax you pay. If you’re a 20 per cent rate taxpayer, you get a £1,000 personal savings allowance.
“If you’re a 40 per cent rate taxpayer, you get £500. If you’re a top rate of taxpayer, you don’t get a personal savings allowance. So think about this for a second. If you’re a basic rate taxpayer with a £1,000 personal savings allowance.
“And you’ve got £20,000 saved at five per cent, which would be slightly higher than top rates at the moment, but it’s easy maths. Well that would generate £1,000, so all of that interest would be tax free, so you actually could have quite a decent amount in savings before you’re paying tax on it with £1,000 of interest tax free, and it’s worth noting money in a cash ISA doesn’t count towards a personal savings allowance because that’s its own tax-free element as well on top, which is why putting money in a cash ISA means you can save even more without the interest being taxed. So they’re the simple ones.”
Similarly, Mr Lewis has clarified that people earning above £50,000 on the higher rate of tax would have the ability to save £10,000 at five per cent without incurring tax.
Starting rate of Savings Tax
Mr Lewis explained: “Now let’s do the more complicated one. The starting rate of savings tax. Now, this is specifically only for people on lower incomes; it only applies to people whose total earnings from all sources are less than £18,570 a year.
“In that scenario, you get up to £5,000 starting savings allowance, and it works like this. If you only earn £12,570 from all sources, you could then earn another £5,000 of interest from savings tax-free. But for each pound of earned income from work or pensions that you have above £12,570, you lose a pound of your starting savings allowance, simple numbers.
“You earn £13,570 that’s £1,000 above your normal personal allowance. Well, your £5,000 starting savings allowance is reduced by £1,000, and you get £4,000 that you could earn tax-free in the starting savings allowance, but you still then get the personal savings allowance, another £1,000 on top.”
He explained that individuals in the ‘perfect circumstance’ would have £12,570 from earned income. Mr Lewis stated the person would then benefit from £5,000 through the starting savings allowance, plus £1,000 from the personal savings allowance on top ‘because they all go on top of each other’.
He said: “You could earn £18,570 a year tax-free with £12,570 of it coming from work or other sources, and another £6,000 of it coming from savings. I hope that makes sense. The main two for most people are the personal allowance and the personal savings allowance, but for those on lower incomes, it’s worth reading the starting savings allowance guide that’s our money saving expert just so you really understand it.”
