The UK government introduced new tax measures on savings and property income in the 2026 budget, which came into effect on April 6. Chancellor John Healey, in his first budget statement, revised previously announced plans by his predecessor to increase income tax rates for savers and landlords, advancing the timeline and raising the rates further than initially proposed.

The revised tax rates on savings interest now stand at 24% for basic-rate taxpayers, 44% for higher-rate taxpayers, and 49% for those on the additional rate, representing a two-percentage-point increase across each band compared to earlier announcements. These changes are expected to significantly impact the returns savers can achieve, especially if inflation remains elevated next year.

Experts warn that with inflation estimated around 3.5%, savers will need gross interest rates exceeding what most standard savings accounts currently offer to maintain the real value of their money. For example, a basic-rate taxpayer would need 4.61% gross interest, while higher-rate and additional-rate payers would require 6.25% and 6.86%, respectively—levels widely seen as unattainable on typical cash savings accounts.

Despite the higher tax rates, several tax-free allowances remain in place. The cash Individual Savings Account (ISA) annual subscription limit will stay at £20,000 for savers aged 18 and over, after Healey dropped plans to reduce this to £12,000 for under-65s in 2027. Savings held within cash ISAs are shielded from tax on interest indefinitely, making these accounts a popular shelter for funds.

Additionally, the personal savings allowance (PSA) allows basic-rate taxpayers to earn up to £1,000 tax-free on savings interest, and higher-rate taxpayers up to £500. Taxpayers in the additional rate band do not benefit from this allowance. There is also a “starting rate for savings” tax band that exempts up to £5,000 of interest for individuals with total income below £17,570.

However, with current interest rates on some accounts exceeding 5%, many savers may quickly exhaust their non-taxable allowance, leading to higher tax bills. For example, a basic-rate taxpayer with £20,000 in a savings account paying 5% interest will fully use their £1,000 PSA, with any additional interest taxed at 24%.

Financial advisers recommend that savers review their portfolio and consider strategies to mitigate the tax impact. These may include fully utilizing ISA allowances, transferring savings within households to partners in lower tax brackets, and considering junior ISAs or child trust funds for children's savings.

Other options include investing in pension schemes, which not only provide tax relief on contributions but also reduce taxable income, potentially lowering the marginal tax rate on savings. However, pension funds are generally inaccessible until retirement age.

Alternative low-risk investments such as premium bonds—offering tax-free prizes instead of interest—and short-dated UK government bonds (gilts) may also be attractive. Gilts held until maturity avoid capital gains tax and can be held within tax-efficient wrappers like stocks and shares ISAs, potentially yielding better after-tax returns than traditional cash accounts, especially for higher-rate taxpayers.

Overall, the new tax structure presents challenges for savers, particularly those in higher tax brackets, prompting calls for careful financial planning to preserve returns in the face of rising taxation and inflation.