How to protect your savings from a rising tax liability

As your savings grow, you no doubt want to hold on to your interest earnings. However, many savers are facing rising tax bills.

In 2025/26, three times as many savers paid over £5,000 in Income Tax on their interest earnings as in 2022/23, as MoneyAge reports. With legislative changes coming next year, many savers could see their bills rise further.

Read on to learn why your savings interest might attract more Income Tax and how you can help protect your savings growth.

4 reasons the Income Tax on your savings may be rising

1.The Personal Savings Allowance is frozen

Depending on your annual income, you may be able to earn some interest tax-free. This is known as the Personal Savings Allowance (PSA).

As of 2026/27, the PSA is as follows:

You will typically pay Income Tax on any interest exceeding your PSA, assuming you don’t have any unused Personal Allowance and the savings are outside of your £20,000 ISA allowance (more on this later).

Crucially, these rates haven’t increased with inflation over the past 10 years. If the basic-rate PSA had kept pace with inflation, the Bank of England’s inflation calculator suggests it would have been £1,411.82 in May 2026, while the higher-rate allowance would have risen to £705.91.

 2. The tax rate for savings interest is rising in 2027

In 2026/27, interest exceeding your PSA is generally taxed at your marginal rate of Income Tax.

However, from 6 April 2027, savings interest will be charged an additional two percentage points, as outlined below:

As a result, not only could more of your interest earnings become taxable, but they will soon be taxed at a higher rate.

3. The Income Tax thresholds are frozen until 2031

The thresholds that determine your Income Tax bracket have been frozen since 2021 and are set to remain unchanged until 2031.

Since the thresholds aren’t keeping pace with inflation, more people are being pushed into higher tax brackets as their incomes rise.

Consequently, more people could see their PSA reduce, while their interest becomes subject to a higher rate of tax. For example, if you go from being a higher-rate taxpayer to paying additional-rate tax on some of your earnings, your PSA could fall from £500 to £0.

4. The Cash ISA allowance will change from 2027

ISAs are an effective tool for earning interest without being subject to tax. In 2026/27, you can tax-efficiently save or invest up to £20,000 a year across all adult ISAs.

However, from 6 April 2027, £8,000 of the allowance will be earmarked exclusively for investment ISAs – meaning the Cash ISA allowance will effectively reduce to £12,000.

The change will only affect those aged under 65.

Ultimately, your opportunity to save tax-efficiently may significantly reduce, subjecting more of your interest to Income Tax at the same time as the rates increase.

3 ways to mitigate your savings’ rising tax bill

1. Use your full ISA allowance

While your Cash ISA allowance may effectively reduce next year (if you’re under 65), there’s still time to make the most of the full £20,000 tax-efficient allowance in 2026/27. When the allowance falls, you could still save up to £12,000 a year into your Cash ISA and earn interest tax-efficiently.

After 6 April 2027, you can still contribute £20,000 to your ISAs, provided at least £8,000 is invested in a Stocks and Shares ISA or Innovative Finance ISA. As such, you might consider investing some of your funds to avoid your money’s growth being taxed.

That said, investing may not be suitable for everyone. The value of your investments could go down, meaning you may not get back the full amount you invested. Seek advice from a financial planner before investing.

2. Pay into your pension

If you don’t plan on using some of your savings until retirement, you might consider paying more into your pension rather than holding lots of wealth in cash.

Pensions typically offer many tax-efficient benefits, including:

• Tax relief: Your contributions are generally topped up at your marginal rate of Income Tax – if you’re a higher or additional-rate taxpayer, you should claim this through Self Assessment. Tax relief is capped at the £60,000 Annual Allowance (2026/27) or your annual income, whichever is lower
• Tax-efficient growth: Your pension funds are invested, and returns are exempt from tax while they are held in your pot

What’s more, your pension contributions are generally deducted from your adjusted net income. This could help you avoid moving into the next tax bracket and becoming subject to a lower PSA and higher tax rate.

It’s worth speaking with a financial planner before making large contributions to your pension. Not only could you risk exceeding your Annual Allowance, but the funds will be out of reach until you hit the normal minimum pension age, which is rising from 55 to 57 in 2028.

3. Gift some of your savings to loved ones

If you’re holding on to funds to either gift to loved ones later in life or pass on as inheritance, you might consider making the gift sooner rather than later.

This could help avoid the interest earnings being taxed, especially if the recipient has unused ISA allowance or PSA, or plans to spend the money in the short term.

Ultimately, this can mean your loved ones receive more of your wealth than if you waited to make the gift, with less going to HMRC. They’ll also start benefiting from your gift sooner, potentially allowing them to reach key milestones earlier in life.

Gifting can also help reduce your estate’s IHT bill. The rules for removing gifted assets from your estate are complex, so speak to a financial planner before transferring large sums.

Get in touch

Identifying the right solution for mitigating your savings’ tax bill can be complex. Naturally, you want to retain as much of your wealth as possible, but you also need to ensure you have access to the funds you’ll need for the rest of your life.

At Dodd Wealthcare, our financial planners can help you devise a strategy tailored to you, balancing tax mitigation against your current and future needs to help you achieve your goals.

Email info@doddwealthcare.co.uk or call 01228 530913 / 01768 864466 to learn more about how we can help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.