Savers are being warned of a tax raid – as interest rates increased (Image: Getty)
A warning has been issued for anyone with savings in bank or building society accounts after the Bank of England hiked interest rates last week. The Bank of England increased interest rates for the first time in more than three years as it warned that inflation is set to soar to around 5%.
Policymakers at the central bank said they were increasing borrowing costs in a bid to combat the rising cost-of-living for British households and businesses. The Bank’s Governor Andrew Bailey also warned that further hikes are likely if the Iran war is not resolved.
Radio 4’s Moneybox program was told that while it might seem like good news for savers – it can also tip them into paying tax – and in the Budget last month Chancellor John Healey hiked on savings interest tax rates.
Rachel Springall from the financial data firm Money Factors , speaking of how the Bank of England committee was unanimous to raise told Radio 4 listeners: “It’s a huge impact and gives us more of an indication of where rates might go.
“I’ve had a look through a lot of the columnists’ opinions on this one and they are expecting another rate rise unfortunately probably by the spring and there are some murmurings about another one later in the summer.
“So it’s not over yet. But as the Bank of England estimated, because of the uncertainty over the war, that’s the path, and the worry about prolonging inflation, and if we prolong inflation, we could get more interest rate hikes.”
Presenter Paul Lewis said the committee also suggested it expects the inflation rate to rise to 5% which has an impact on savers. Ms Springall said: “Next year there’s a lot going on for savers. We’re getting an increase in savings tax by around 4% across the board. So having higher interest rates can feellike a good thing because you’re getting more return.
“But higher inflation means your money doesn’t go as far and potentially breaching your thresholds for your personal savings allowance. And when you do that you get taxed so this is why cash ISAs and sotcks and shares ISAs because you can protect your money from that.”
Mr Lewis asked what the best savings rates are currently. Ms Springall said: “So if you’re looking for a variable rate you’re looking at about 5%. A lot of those deals have bonuses so you’re not going to get 5% for a whole year potentially. If you’re looking at fixed you do want over 5% for the top fixed rates but if you’re looking at a branch-based account then potwentially look at building societies. They’re offering some of the best branch-based rates at the moment.”
During his speech, Mr Healey spoke of a ‘further 2%’ for savers – and BBC Radio 4’s Moneybox programme revealed that this came on top of an increase already outlined by his predecessor Rachel Reeves.
Basic rate taxpayers (20%) are allowed to earn up to £1,000 in savings interest tax-free annually, higher rate taxpayers (40%) can earn up to £500 in savings interest tax-free each year, while additional rate taxpayers face tax on all savings interest.
From April 2027, the levy on savings income will rise to 24% for basic rate taxpayers, up from the previously scheduled increase of 22%.
Chartered financial planner Ray Black and founder of Money Minder said: “There is a starting block of a bright side. Not everybody with savings is going to pay more tax. We’ve still got the personal savings allowance that’s £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and the ISAs still remain tax free. your ta
“So the people who have got savings of somewhere between £20-25,000 and they’re getting top rates of somewhere between 3.5 to 4 per cent – they may not feel the pinch of this extra tax at all. However there is those people that have got more than £1,000 savings interest coming in and it’s a 20 per cent increase for them,”.
Mr Lewis added: “The number of higher rate taxpayers has doubled to 8 million since the threshold freeze started in 2022. They’ll be paying 44%. Is there a way of planning for it?” Mr Black said: “First and foremost, you really need to understand how much interest you’re making in the bank. So £20-£25,000 if the interest you’re getting is under £1,000 per person.”
He recommended people utilise tax-free ISAs. Janet told the show: “I get my money mainly from savings. My ex-husband gets his income from pensions. As a result of this budget for the same income I will be taxed at a 4% higher rate than he is.”
Mr Black described the outcome as not ‘fair’. Another caller mentioned her mother had substantial funds set aside for her care home which will face higher taxation.
Listener Christopher characterised it as ‘taxing prudence. ‘ Responding to the budget, personal finance expert Mr Lewis said: “Problem on savings though. If you’re saving and you pay tax on the interest, so you’ve used up your your ISAS, you’ve used up your personal savings allowance, the, £1,000 pounds of interest you can make a year tax free from savings.
“Well, from April 2027, the interest on savings, the tax rates going up. Basic rate taxpayers will pay 24%, high rate taxpayers 44%, top rate taxpayers 49%. Basically, the normal rate plus 4%. So, it’s worth making sure you use your tax free allowances.”
BBC Expert Issues £1,000 Warning to Savers After Bank of England Decision
Millions of British savers are being warned to review their finances after the Bank of England announced a major interest rate increase, with financial experts highlighting the possibility of unexpected tax bills for people holding money in ordinary savings accounts.
The latest decision has created a complicated situation for households. While higher interest rates can mean better returns on savings, they can also push people over their tax-free savings allowances, leaving them facing additional payments to HMRC.
Financial experts speaking on BBC Radio 4’s Moneybox have warned that savers should not automatically assume that higher interest rates are entirely good news.
With inflation continuing to put pressure on household finances, the latest developments could have significant consequences for people who have spent years carefully building their savings.
Bank of England Raises Interest Rates to 4%
On November 5, 2026, the Bank of England increased its base interest rate by 0.25 percentage points, taking it from 3.75% to 4%.
The decision marked the first increase since August 2023.
The central bank explained that rising energy prices, partly linked to the conflict in the Middle East, were creating renewed inflationary pressure.
Inflation had reached 3.5%, and the Bank warned that it could rise to approximately 5% by the middle of 2027.
Governor Andrew Bailey explained that increasing interest rates was necessary to prevent higher energy costs from spreading throughout the wider economy.
However, the decision has created a mixed picture for British households.
Mortgage borrowers could face higher repayments, while savers may benefit from improved interest rates.
But there is another issue that could affect people with substantial savings: taxation.
BBC Expert Issues £1,000 Savings Warning
Rachel Springall, a financial analyst at Moneyfacts, warned listeners to BBC Radio 4’s Moneybox that higher savings rates could push more people beyond their annual tax-free allowances.
The Personal Savings Allowance determines how much interest people can earn from ordinary savings accounts before paying income tax.
The current allowances are:
- Basic-rate taxpayers can earn up to £1,000 in savings interest tax-free each year.
- Higher-rate taxpayers can earn up to £500 tax-free.
- Additional-rate taxpayers have no Personal Savings Allowance.
This means that people with larger savings balances could find themselves facing an unexpected tax liability as interest rates increase.
For example, someone earning 4.5% interest on £25,000 would receive £1,125 annually.
A basic-rate taxpayer would therefore exceed their £1,000 allowance by £125.
The amount exceeding the allowance would normally be subject to income tax.
Why Higher Interest Rates Could Become a Problem
At first glance, receiving more interest from a bank or building society appears to be positive.
However, the situation becomes more complicated when inflation and taxation are considered together.
Springall warned that savers should pay attention to the possibility of additional interest rate increases.
She suggested that financial markets and commentators were anticipating the possibility of further increases during 2027, although the Bank of England has emphasised that future decisions will depend on economic developments.
Higher savings rates could increase the amount of interest earned, potentially pushing more people beyond their tax-free allowances.
At the same time, inflation could reduce the purchasing power of the money people have saved.
This means that receiving more interest does not necessarily translate into a significant improvement in someone’s financial position.
Another Blow From the Chancellor
The situation is becoming more complicated because of changes to savings taxation announced in the October 2026 Budget.
From April 2027, the tax rates applying to savings income are scheduled to increase by four percentage points.
Under the announced changes:
- Basic-rate taxpayers will pay 24% instead of 20%.
- Higher-rate taxpayers will pay 44% instead of 40%.
- Additional-rate taxpayers will pay 49% instead of 45%.
These changes will apply to taxable savings interest outside tax-free arrangements.
For people who have accumulated significant savings over many years, the additional tax could reduce the returns they receive.
However, not everyone will be affected. People whose interest remains within their Personal Savings Allowance will not automatically face additional tax.
Martin Lewis Urges Savers to Use Tax-Free Allowances
MoneySavingExpert founder Martin Lewis has repeatedly highlighted the importance of understanding savings taxation and making use of available tax-free allowances.
Cash ISAs remain particularly important because interest earned within these accounts is generally free from UK income tax.
The annual ISA allowance is currently £20,000.
However, from April 2027, the annual cash ISA allowance for people under 65 is scheduled to fall to £12,000, while the overall ISA allowance will remain £20,000.
This means savers will need to consider their options carefully when deciding where to keep their money.
Financial experts also recommend checking whether existing savings accounts are still paying competitive interest rates.
Some banks and building societies offer attractive introductory rates, but these can fall significantly after promotional periods end.
How Much Could Savers Actually Lose?
The financial impact depends on the amount saved, the interest rate received and the individual’s tax position.
Consider someone with £30,000 in an ordinary savings account earning 4.5% annually.
Their yearly interest would be £1,350.
A basic-rate taxpayer would exceed the £1,000 Personal Savings Allowance by £350.
Under the current 20% tax rate, the resulting tax would be £70.
From April 2027, assuming the announced 24% rate applies, the tax would increase to £84.
For higher-rate taxpayers, the impact could be greater because their tax-free allowance is only £500.
These figures demonstrate why reviewing savings arrangements is becoming increasingly important.
What Should Savers Do Now?
Financial advisers recommend that people begin by calculating how much interest their savings are expected to generate over the current tax year.
They should then compare this amount with their Personal Savings Allowance.
Other practical steps include checking whether a Cash ISA could provide a more tax-efficient home for some savings, reviewing interest rates and understanding the conditions attached to fixed-term accounts.
People should also consider whether locking money away is appropriate for their circumstances, particularly if they may need access to emergency funds.
Moving money simply to obtain a higher interest rate is not always the best decision.
The tax position, withdrawal restrictions and overall financial circumstances all matter.
Conclusion
The Bank of England’s decision to raise interest rates to 4% has created new opportunities for British savers, but it has also highlighted the growing importance of understanding savings taxation.
Higher returns may appear attractive, yet people who exceed their tax-free allowances could find that HMRC takes a portion of their additional interest.
With further tax changes scheduled for April 2027, savers have good reason to examine their accounts and understand how the new rules could affect them.
The message from financial experts is clear: earning more interest is welcome, but keeping as much of it as legally possible requires careful planning.
For millions of British households, the challenge is no longer simply finding a good savings rate. It is making sure that rising returns do not come with an unexpected tax bill.