“Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.”
So said the Labour manifesto in 2024.When national insurance (NI) rates were raised by Rachel Reeves in 2024, the explanation provided by the government was that the manifesto was talking about employees’ NI, not employers’ NI. In last year’s Budget, Rachel Reeves announced that she would be increasing the rates of tax on interest and other savings income by two percentage points from 2027/28. Was that an increase in income tax rates?
Look at the Finance Act 2026 and you discover that three new rates of tax have been invented: savings basic rate, savings higher rate and savings additional rate. Arguably, basic, higher and additional rates – all described as default rates – were left unchanged.
The relative ease with which this income tax increase was achieved may help explain why Rachel Reeves’ successor John Healey has chosen to double down on the initial rise in his recent Budget. From 2027/28, across the UK:
- savings basic rate will be 24%;
- savings higher rate will be 44%; and
- savings additional rate will be 49%.
HMRC estimates that in 2027/28, Mr Healey’s additional two percentage points mean around one in eight taxpayers will see an average tax rise of £113 annually. Double that figure for the full impact of the four-point increase. The reason why the bulk of taxpayers will escape is the personal savings allowance, which since 2016/17 has been:
- £1,000 for basic rate taxpayers;
- £500 for higher rate taxpayers; and
- nil for additional rate taxpayers.
Assuming an interest rate of 4%, a basic rate taxpayer with over £25,000 on deposit and a higher rate taxpayer with over £12,500 could be paying more tax – as will all additional rate taxpayers.
If you face a higher tax bill on interest, it may be worth closing deposit accounts before 6 April 2027 to crystallise interest in 2026/27 – but watch out for any account closure charges. Other strategies can help in the longer term, but seek advice tailored to your personal circumstances.
Read more about the Budget changes here and tax on savings interest here.
Photo by Szymon Shields on Unsplash
