Budget 2026: how to beat the new savings tax rates

John Healey’s budget offered a ‘sting in the tail’ for savers by raising tax rates but there are ways to ease the pain

Savers were both winners and losers in Wednesday’s budget. In his first outing as chancellor, John Healey dropped a plan to cut the cash Isa limit for under-65s but surprised everyone with an extra tax charge on savings and property income. His predecessor, Rachel Reeves, had already announced a plan to increase the income tax rates for savers and landlords that was due to take effect in April 2027. But Healey went further, adding an additional two percentage points to each of the rates.

Jason Hollands, managing director at wealth manager Evelyn Partners, describes the higher rates as a “sting in the tail” for savers.

However, he says: “There are practical steps savers can consider to mitigate this interest tax crunch, although the right approach will depend on their circumstances.”

The levels of tax, which will apply to savers across the UK, will be 24% for basic-rate taxpayers, 44% for higher-rate taxpayers and 49% for those on the additional rate. They come into effect on 6 April.

This means it will get harder to find savings accounts that beat inflation – especially if, as expected, that stays high next year.

Anna Bowes, personal finance expert at advice firm The Private Office, says if inflation hits 3.5%, with the new tax to pay, a saver who pays basic-rate tax will need to earn 4.61% gross interest to retain the value of their money.

A higher-rate payer will need 6.25% gross, and an additional-rate taxpayer will need 6.86%. Currently, she says, these higher two rates “are impossible as far as I am aware” to find on a standard savings account.

There are, however, allowances you can use that will protect some savings, meaning you can beat inflation with a lower-paying account.

Most people can earn a chunk of interest from their savings without facing any tax bill. You don’t have to pay tax on anything earned on money held in cash Isas, and the maximum amount you can put into one in each tax year is going to stay at £20,000.

This was set to be slashed to £12,000 for anyone aged under 65 from April 2027. But Healey has ditched that plan.

Aside from Isas, other things come into play that reduce the tax you pay on savings, or mean you don’t pay any tax at all.

Your tax-free personal allowance covers all of your income, and for the 2026-27 tax year, this is £12,570.

If your personal allowance isn’t fully used up by your wages, pension or other income, HM Revenue and Customs will apply it to your savings interest.

And there are two more savings allowances that people can benefit from.

There’s the personal savings allowance (PSA), which means basic-rate taxpayers can receive £1,000 of interest each financial year without paying any tax, and higher-rate taxpayers can receive up to £500. Additional-rate taxpayers don’t get any PSA.

Until a few years ago, you would usually have needed to have a huge amount saved before exceeding the £500 or £1,000 threshold, but with accounts currently paying 5%-plus, it is much easier to get caught out.

There’s also the “starting rate for savings,” which some people on a low income can get on top of the PSA, where you can earn up to £5,000 of interest without paying tax on it. To benefit, the rest of your income (for example, wages or pension) has to be less than £17,570 a year.

The Isa allowance governs how much you put in each year while the PSA is based on how much you get back.

How quickly you use up the PSA depends on your tax position. A basic-rate taxpayer who puts £20,000 cash into a non-Isa savings account paying 5% interest will earn annual interest of exactly £1,000 – so will use up their entire PSA. If they found a higher paying account, they would face 24% tax on all the interest over £1,000, so they’d hand over 24p of every £1.

For a higher-rate taxpayer it would only take £10,000 in the same account to wipe out their £500 PSA. They would pay a rate of 44% on everything they earned over £500 – 44p in the £1.

When it comes to Isas you can put in up to £20,000 every tax year, as long as you are over 18. Once money is in a cash Isa it is protected from tax forever, so over time you can build up a huge amount of savings that don’t attract tax, as long as you don’t withdraw them.

You do not have to leave it with the same provider. You can move around to get better rates – subject to individual account rules – so it is wise to make the most of this shelter.

If you have a substantial savings nest egg you might want to review where they are held. Experts always recommend that you have emergency funds that are easy to access, so do not let a small tax bill deter you from doing that.

But Hollands says it is worth checking that you are not holding too much in savings. “Holding more cash than you need for several years can mean missing out on the potential for longer-term investment growth,” he says.

Look at your family situation. Hollands says couples who are married, or in a civil partnership, should look at their savings and allowances together.

If you have both used your Isa and personal savings allowances, but one partner pays tax at a lower rate, he says transferring cash to them could reduce an overall family tax bill.

“But this needs to be a genuine transfer: the money becomes theirs, legally and in practice, and they must be free to decide what to do with it, so trust is key,” he says.

If you’re saving for a child’s future, consider putting it in their name instead of holding it yourself. Pay into their child trust fund, or junior Isa if they already have one, or set up a junior Isa. You can pay up to £9,000 a year into a junior Isa, and all the returns are tax-free.

Outside the Isa wrapper there will still be a potential tax bill if you are the child’s parent. If the child earns more than £100 in interest from money you have put in their account, you will be taxed on the returns. This isn’t the case if you are a grandparent.

Check whether you could make your money work harder by overpaying on your mortgage (see right), or putting more into your pension. Money paid into your pension won’t just avoid the savings tax, it will also attract a nice tax break and, possibly, cut the rate you would need to pay on savings.

Dan Coatsworth, head of markets at AJ Bell, says: “When you pay into your pension, you can get tax relief at your highest marginal rate and lower your ‘adjusted net income’.

“Not only does it mean you pay less tax on your income, but it could also help bring you back below other tax thresholds, while helping boost your prospects for retirement at the same time.”

If you do that, the cash will be locked in. For money that you need access to, there are options. Premium bonds are one. There’s no interest and prizes are all tax-free. Each person in the UK can hold up to £50,000, and they are government-backed so are a safe place for your cash. The prize fund recently increased so each bond has a 21,000-1 chance of winning.

Holland and Coates both suggest low coupon short-dated gilts as an alternative place to put cash. These are UK government bonds, paying a small annual interest rate, and set to mature within the next couple of years. When they mature the return you get will not be liable for capital gains tax (CGT).

This type of investment can be bought via an investment platform, and can be held in your stocks and shares Isa, or outside it. You will face some kind of fees for running the account. Most of the return comes from the CGT saving at the end, and this can make them very attractive in terms of the after-tax returns, when compared to the post-tax interest on a cash savings account, says Holland.

“This is especially the case for people subject to the higher and additional rates of tax,” he says.