UK Budget Shock: Savers and Landlords Face Income Tax Hikes of Up to 4 Percentage Points From 2027

Savers and landlords in the UK will face higher income tax on savings interest and rental income from April 2027 following changes announced by Chancellor John Healey in the Budget.

The changes introduce an additional two-percentage-point increase on top of a rise announced by former Chancellor Rachel Reeves in last year’s Budget. As a result, the tax rates applied to these forms of income will increase by a combined four percentage points.

Basic-rate taxpayers will pay 24 per cent tax on savings interest and rental income, up from 20 per cent currently. Higher-rate taxpayers will face a rate of 44 per cent, compared with 40 per cent, while additional-rate taxpayers will pay 49 per cent, up from 45 per cent.

The changes will not affect income tax rates on earnings from employment.

Government Says Asset Income Will Contribute More

The Budget documents described the changes as a measure to secure an additional contribution from people receiving taxable income from assets.

The Government said the approach was intended to be “fair and proportionate”.

According to Labour’s forecasts, approximately 16 per cent of income taxpayers will be affected. Half of the additional revenue is expected to come from the wealthiest 10 per cent of households.

The Treasury expects the increased tax on rental income to raise £455 million by the 2031–32 financial year. The higher tax on savings interest is projected to generate a further £590 million.

OBR Warns of Possible Impact on Rents

The Office for Budget Responsibility (OBR) warned that the higher tax on rental income would reduce returns for private landlords.

Its forecasts also indicated that the changes could contribute to a gradual increase in rents.

Landlords pay income tax on rental profits after deducting eligible expenses, including repairs, letting agents’ fees and insurance. The new rates will therefore apply to taxable rental income rather than necessarily to the full amount collected from tenants.

Personal Savings Allowances Remain Unchanged

The tax increase will affect savers whose interest income exceeds their personal savings allowance and who hold money outside tax-free accounts.

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Basic-rate taxpayers currently have a personal savings allowance of £1,000 a year, while higher-rate taxpayers can receive up to £500 in interest before paying tax. Additional-rate taxpayers do not receive a personal savings allowance.

The new rates will apply to taxable interest from April 2027, increasing the amount some savers pay on interest above their allowances.

Cash ISA Allowance Cut Reversed

The Budget also reversed a previous proposal by Reeves to reduce the annual cash Individual Savings Account (ISA) allowance from £20,000 to £12,000 from April 2027 for people under 65.

The planned reduction will no longer proceed, leaving the existing £20,000 allowance in place.

However, the higher tax rates on interest earned outside tax-free accounts mean that some savers could still face larger tax bills if their interest exceeds the relevant personal allowance.

Example Shows How Savings Tax Will Change

A higher-rate taxpayer holding £20,000 in a savings account outside an ISA, earning 4 per cent interest annually, would receive £800 in interest.

After applying the £500 personal savings allowance, £300 would be taxable. Under the new 44 per cent rate, the tax on that amount would rise to £132, leaving £168 after tax. Under the current 40 per cent rate, the tax would be £120, leaving £180.

A basic-rate taxpayer with £30,000 in a non-ISA account paying 4 per cent interest would earn £1,200 annually. After the £1,000 allowance, £200 would be taxable.

From April 2027, the tax on that interest would increase to £48 from £40, reducing the amount retained by the saver.

Landlords Face Higher Tax on Rental Profits

Landlords will also pay more tax on their rental profits under the new rates.

A basic-rate taxpayer receiving £12,000 in rental income after eligible expenses currently pays £2,400 in income tax. From April 2027, the bill would rise to £2,880, an increase of £480.

For a higher-rate taxpayer receiving the same taxable rental income, the annual tax bill would increase from £4,800 to £5,280.

The impact will depend on each landlord’s taxable income and circumstances.

Financial Experts Urge Savers to Review Tax-Free Allowances

John O’Connell, chief executive of the TaxPayers’ Alliance, criticised the decision to increase taxes on savings and investment income.

“Deciding to target savings and productive investment means even more punishment for people doing the right thing, and a drag on much-needed growth,” he said.

Jason Hollands, managing director at wealth management firm Evelyn Partners, said savers should pay close attention to the tax allowances available to them.

He said the tax environment was expected to become more challenging and encouraged households to make effective use of ISAs and pensions, alongside seeking financial planning advice where appropriate.

The new tax rates on savings interest and rental income are scheduled to take effect in April 2027.