The 2025 Autumn Budget confirmed a number of changes to how savings income will be taxed from April 2027. The headline increase appears relatively small, but the wider impact could be more noticeable once changes to allowances and ISA rules are taken into account.
If you have savings, investments, or business cash reserves, now is a good time to review how they are held. It’s worth checking whether your current arrangements are still tax-efficient.
What Is Changing?
From 6 April 2027, the tax rates applied to savings income, including bank interest, will increase by 2 percentage points across all income tax bands.
This means:
- Basic-rate taxpayers will see savings tax increase from 20% to 22%
- Higher-rate taxpayers will move from 40% to 42%
- Additional-rate taxpayers will move from 45% to 47%
Although a 2% increase may not sound dramatic, the cumulative effect becomes more significant as savings balances and interest rates rise.
Changes to Allowances Could Have a Bigger Impact
Alongside the tax rate increases, the way allowances are applied is also changing.
From April 2027, personal allowances and other tax reliefs will generally be used against non-savings income first. In practice, this means savings interest may become taxable more often, even for people earning relatively modest levels of interest.
Currently, many savers pay little or no tax on their interest because allowances absorb it. Under the new rules, those allowances may already be fully used against employment income, pensions, or rental income before savings interest is considered.
As a result, some taxpayers who previously paid no tax on savings income may start seeing a tax liability.
What Could This Mean in Practice?
For someone earning £500 of savings interest, the impact may still be limited if they remain within their Personal Savings Allowance. However, if their allowances are already used elsewhere, that same interest could become taxable at the new higher rates.
The difference becomes more noticeable with larger savings balances. A saver earning £1,500 of interest could see their annual tax bill increase compared to current rules, particularly if they are a higher-rate taxpayer.
While these increases are not necessarily substantial in isolation, they add to the wider trend of frozen tax thresholds and reduced tax-free allowances.
ISA Changes Also Matter
Another important change announced alongside the savings tax reforms is a reduction in the annual cash ISA deposit limit for many savers from April 2027.
This could result in more money being held in standard taxable savings accounts rather than tax-free ISA wrappers, increasing overall exposure to savings income tax.
For individuals holding significant cash balances, this makes tax planning around savings even more important.
Why Business Owners Should Pay Attention
These changes are not just relevant to personal savers. Many small business owners hold cash reserves within their personal accounts or rely on savings interest as part of their wider income mix.
As tax on savings income increases, it may become worth reviewing:
- Whether excess cash is being held efficiently
- The balance between cash savings and investments
- How personal and business cash reserves are structured
- Whether ISA allowances are being fully utilised before the rules change
With interest rates remaining relatively high compared to recent years, savings income is becoming a more important part of many people’s finances.
Planning Ahead Matters
The changes do not take effect until April 2027, but early planning can help reduce the long-term impact.
Reviewing your savings arrangements now provides an opportunity to consider your options. For example, should funds should remain in cash, move into ISA wrappers, or form part of a broader investment strategy.
Understanding your total taxable income, including employment income, dividends, pensions, rental income, and savings interest, will also help identify whether the new rules are likely to affect you significantly.
The increase in savings income tax rates from April 2027 is relatively modest on paper. However, higher tax rates are only part of the story. Changes to allowance rules and reduced ISA incentives could mean more savers pay tax on their interest income.
For some people, the impact may be small. For others, particularly higher-rate taxpayers or those with larger cash balances, the changes could become more noticeable over time.
Planning ahead now can help ensure your savings remain structured as tax-efficiently as possible.
At Greystone Advisory, we help individuals and business owners review their tax position, savings strategy, and long-term financial planning. By doing this, there are fewer surprises later on. Contact us if you would like any further information.
