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.
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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’s £1,000 Warning to Savers After Bank of England Decision
The Bank of England’s latest interest rate decision has brought an unexpected warning for millions of British savers. While higher interest rates might initially appear to be good news for people keeping money in savings accounts, financial experts are warning that the benefits could be reduced by higher taxes, rising inflation and changes to personal savings allowances.
The warning, highlighted on BBC Radio 4’s Money Box, comes after the Bank of England increased its base interest rate from 3.75% to 4% on 5 November 2026. It was the first increase in more than three years, reflecting growing concerns about inflation and rising energy prices.
For savers hoping to earn more from their money, the decision could have important consequences. Receiving additional interest may push some people beyond their annual tax-free savings allowance, leaving them with an unexpected tax bill.
The central message from financial experts is clear: earning more interest does not necessarily mean keeping more money.
The £1,000 Personal Savings Allowance Explained
The £1,000 figure is particularly important because it represents the annual Personal Savings Allowance available to basic-rate taxpayers.
Under the current rules:
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Basic-rate taxpayers: Can receive up to £1,000 in savings interest tax-free each year.
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Higher-rate taxpayers: Can receive up to £500 in savings interest tax-free.
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Additional-rate taxpayers: Do not receive a Personal Savings Allowance.
This means someone with substantial savings could find themselves paying tax on interest even though they have not withdrawn or spent their original money.
For example, a basic-rate taxpayer earning £1,200 in annual savings interest would exceed their tax-free allowance by £200. Only the excess would be subject to savings income tax.
The situation is expected to become more challenging from April 2027, when the reported changes will increase savings income tax rates by four percentage points across the income tax bands.
Why the Bank of England Raised Interest Rates
The Bank of England’s decision was primarily driven by concerns about inflation.
Its Monetary Policy Committee voted by eight to one to increase the base rate to 4% on 4 November 2026.
The Bank explained that rising global energy prices, partly connected to the continuing conflict in the Middle East, were creating additional inflationary pressures.
UK inflation reached 3.5% in September, and the Bank projected that it could rise to approximately 5% by the middle of 2027.
Governor Andrew Bailey also indicated that further increases could be necessary if inflationary pressures persisted.
However, the Bank stressed that future interest rate decisions would depend on economic developments rather than following a predetermined schedule.
For savers, this creates a complicated situation. Higher interest rates can increase returns, but inflation reduces the purchasing power of those returns.
How Savers Could Protect Their Money
Financial experts have highlighted several ways people can manage the potential tax implications.
1. Consider a Cash ISA
Cash ISAs allow eligible savings interest to be earned tax-free. This can be particularly useful for people whose savings interest approaches or exceeds their Personal Savings Allowance.
2. Check existing savings rates
Some banks may not pass the full Bank of England rate increase on to existing customers. Moneyfacts reported on 13 November that seven in ten providers that had increased rates had failed to pass on the full quarter-point increase across all their variable-rate accounts.
3. Compare fixed and variable accounts
Fixed-rate accounts can offer more predictable returns, while easy-access accounts provide greater flexibility. Savers should consider withdrawal restrictions and whether the interest rate is temporary.
4. Calculate annual interest
People should calculate how much interest they expect to earn across their savings accounts rather than looking only at the balance in one account.
Banks Are Facing Another Challenge
There is also growing frustration that commercial banks are not passing higher interest rates on to savers as quickly as they adjust borrowing costs.
According to Moneyfacts, more than 100 savings providers had yet to decide whether to increase their variable savings rates following the Bank of England’s November decision.
This creates a potential disadvantage for customers who leave their money in older accounts paying relatively low interest.
In other words, savers could face two separate problems: higher taxation on interest and banks failing to provide the full benefit of higher base rates.
Conclusion: Savers Must Pay Attention to the Changing Rules
The Bank of England’s interest rate increase should, in theory, provide an opportunity for British households to earn better returns on their savings. However, the tax changes expected from April 2027 mean that some people could find themselves keeping less of the interest they earn.
The £1,000 Personal Savings Allowance is therefore an important figure that every saver should understand.
For pensioners relying on savings income, families putting money aside for future expenses and people who have worked hard to build financial security, these changes could have meaningful consequences.
The government’s challenge is to ensure that the tax system does not unnecessarily discourage responsible saving.
Ultimately, higher interest rates should be an opportunity for savers, not a reason to overlook the tax implications. Understanding allowances, comparing savings accounts and making appropriate use of tax-free ISAs will become increasingly important as the new rules approach.