The amount the Treasury rakes in from savings tax will rise from 2027 when a tax hike announced by Rachel Reeves in the Budget will kick in.
The Chancellor has announced a surprise 2 percentage point increase to the rates of tax savers pay on their savings interest from April 2027.
From then, basic rate taxpayers will pay 22 per cent tax on savings interest over the Personal Savings Allowance (PSA).
Higher rate taxpayers will pay 42 per cent on savings interest over their PSA while additional rate taxpayers, who have no PSA, will pay 47 per cent tax on their savings interest.
The savings income tax hike will bring the level of savings tax paid over the levels of income tax which are currently paid on savings interest.
Currently, all basic-rate and higher-rate taxpayers benefit from a PSA, which sets out how much interest they can earn before paying tax on it at their normal rate of income tax.
Hiked: The Chancellor has hiked the level of savings interest tax by 2p from April 2027
Currently, basic rate taxpayers can earn £1,000 interest before paying tax at 20 per cent, paying 20p tax on every £1 of interest earned beyond £1,000.
Higher rate taxpayers can earn £500 before paying tax at their income tax rate of 40 per cent, paying 40p on every £1 savings interest earned after £500.
While additional rate taxpayers have no PSA and pay tax on all savings interest at a rate of 45 per cent, 45p on every £1 interest earned on savings.
The Treasury rakes in around £6billion a year in savings interest tax receipts.
The OBR says the move will raise an extra £500million a year on average from 2028/29.
This will include a £100million reduction from behavioural shifts in savers using Isas more to mitigate the higher amounts of savings tax they will have to pay.
In 2027/28 the Treasury expects savings interest tax receipts to generate an extra £55million and the amount raised through the new savings tax thresholds will peak in 2028/29, raking in an extra £550million for the Treasury.
It comes as the Chancellor announced that from April 2027, the cash Isa allowance will be lowered to £12,000 from £20,000 for all savers under the age of 65.
Savers under the age of 65 will be able to save up to £12,000 in a cash Isa from April 2027.
The remaining £8,000 they would have been able to save in a cash Isa can either be invested in a stocks and shares Isa or kept in a normal savings account where they may incur tax on the interest.
Higher rate taxpayers and savers with larger amounts will be the worst hit by the savings income tax hike and younger savers will not be able to shelter as much of their cash savings in a cash Isa to avoid paying tax.
Under the new rates of tax on saving interest, a higher rate taxpayer with £12,000 in the best easy-access account paying 4.11 per cent would earn around £502.60 after a year.
They would have to pay 42 per cent tax on the £2.60 interest over their £500 PSA for a savings interest tax bill of £1.10.
An additional rate taxpayer in this scenario would have to pay 47 per cent on the £502.60 interest their savings earned for a savings interest tax bill of £236.22.
The move, combined with the extended freeze on income tax bands, means that more people will be pushed into the next tax band and in turn see a cut to their tax-free savings allowance and a hike to their tax rate.
For someone with £5,000 of savings interest above their personal savings allowance, the move will cost them an extra £100 a year in tax, according to stockbroker AJ Bell.
A higher-rate taxpayer with a £50,000 savings pot earning 4 per cent interest will face £380 more tax over 10 years thanks to the tax increase.
For a basic-rate taxpayer this will be £135 in extra tax across that period.
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