Millions of cash savers across the UK are set to be hit with significantly higher tax bills from April 2027 due to a trio of major financial changes announced in the Budget. Analysis reveals that some households could face an extra £2,380 in tax over just five years.
The Triple Blow to Savers' Pockets
The Labour government has confirmed a punishing set of measures that experts have labelled a "triple blow" for those with money in savings accounts. The key changes are a cut to the annual Cash ISA allowance, a continued freeze on the personal savings allowance, and an increase in tax rates applied to savings interest.
From April 2027, the Cash ISA allowance will be reduced from £20,000 to £12,000 for individuals under the age of 65. Simultaneously, the personal savings allowance – the amount of interest you can earn tax-free outside an ISA – will remain frozen. Tax rates on savings interest are also being increased.
Who Will Be Hit Hardest?
Laura Suter, director of personal finance at investment platform AJ Bell, warned the changes will mean savers "will see more of their money taxed at higher rates." The impact will be felt across the board, but additional-rate taxpayers are in line for the steepest penalties.
These taxpayers receive no personal savings allowance at all, meaning they pay tax on every pound of interest earned outside an ISA. AJ Bell's research calculates that an additional-rate taxpayer who can no longer shelter their full £20,000 will face a total tax bill of £2,380 after five years, soaring to a staggering £9,349 over a decade.
Even basic-rate taxpayers, who benefit from a £1,000 annual tax-free savings allowance, are not immune. They could see a £240 tax bill after five years, rising to over £2,400 in ten years.
Government Aim Versus Savers' Reality
The government has framed the cut to the Cash ISA allowance as a move to incentivise more people to start investing. However, AJ Bell's research suggests this may not work in practice. Their survey found that 51% of Cash ISA holders would simply move any surplus cash into a standard taxable savings account if the allowance was cut.
"In reality many people will just leave their money in non-ISA accounts and so pay tax on their savings interest," Suter commented. She also noted that the potential revenue from these changes was not clearly broken out in the Budget, raising questions about how much extra tax the Treasury expects to collect.
For anyone currently maximising their £20,000 Cash ISA allowance, the new £12,000 limit will leave £8,000 of savings annually needing a new, potentially taxable home. This shift, combined with the other frozen allowances and higher rates, creates a perfect storm for growing tax liabilities on hard-earned savings.
