This means more tax paid to the government from interest earned on savings. Apart from Cash ISA allowances, which fall from £20,000 to just £12,000 for under-65s next year, there is also the Personal Savings Allowance (PSA). This allows those who are in the basic tax rate bracket to earn tax-free interest of up to £1,000 on savings. However, the more you earn, the lower this allowance gets.
For those who are in the higher tax bracket (those who earn between £50,271 and £125,140), this allowance falls to just £500.
“When it comes to savings, frozen income tax thresholds mean more people are finding themselves taxed at higher rates, even when their overall spending power has not increased by the same amount,” said Charlene Young, senior pensions and savings expert at AJ Bell.
“Savings income will account for around 2.4% of the total income tax take in the UK in 2026/27, an increase on the year before. This is no surprise when you consider the personal savings allowance has been stuck at £1,000 for basic rate taxpayers since it was introduced over a decade ago.
“Those who tip into the higher rate tax band will have an allowance of just £500 while additional rate taxpayers get nothing at all, meaning they face a 45% tax charge on their savings outside of tax wrappers.”
She warned that this means some smaller investors who earn interest on these investments get a worse deal. She explained: “The government expect to raise £19.77 billion from tax on dividends in the 2026/27 tax year, up 10% from last year.
“Dividend tax bills continue to climb thanks to an increase in the rates of tax for investors in the basic and higher income tax bands, and the dividend tax allowance continues to sit at a measly £500.
“When the tax-free allowance for dividends was introduced in 2016, it sat at £5,000, shielding most smaller retail investors. But since the last tax year, it has sat at just £500, meaning these same investors now face a tax bill on investments they don’t hold within a Stocks and Shares ISA.”
