Many people think of cash as the safe option. It’s easy to access, doesn’t fluctuate in value like investments and can provide peace of mind during uncertain times.
If you’re holding a large amount in cash, upcoming changes to how savings interest is taxed could mean more of your returns end up with HMRC instead of in your pocket.
What’s changing?
From 6 April 2027, the government plans to increase the tax charged on savings interest above your available tax-free allowances.
Under the latest proposals, savings income will be taxed at:
- 24% for basic-rate taxpayers (up from 20%)
- 44% for higher-rate taxpayers (up from 40%)
- 49% for additional-rate taxpayers (up from 45%)
As a result, some savers could find themselves paying significantly more tax on the interest their cash savings generate.
The impact on larger cash balances
The changes could be an issue for people holding substantial sums in savings accounts. For example, at present, someone with £200,000 in cash in an account earning 4% interest could generate £8,000 of interest over a year.
A higher-rate taxpayer, entitled to a £500 Personal Savings Allowance, would currently face a tax bill of around £3,000 on that interest. Under the proposed rules, the tax bill would rise to £3,300, reducing the amount of interest they keep to £4,700.
That may not sound like a big increase in taxation, but it’s worth remembering that inflation also reduces the spending power of cash over time. Even when your savings balance is growing, the real value of your money may be stagnating or even falling.
Is cash still the best place for your money?
Cash remains an important part of any financial plan. It can provide a safety net for emergencies, help cover planned spending and offer reassurance during periods of market uncertainty.
The question isn’t whether you should hold cash at all. It’s whether you’re holding more than you actually need. Many people gradually build up large cash balances without reviewing whether all of that money needs to remain in savings accounts. While it may feel comfortable to do so, the combination of inflation and higher taxation could make holding excess cash increasingly expensive.
That doesn’t mean moving money elsewhere is automatically the right answer. Investments carry risks, and money that may be needed in the short term is often best kept readily available. However, if a significant portion of your cash is intended for longer-term goals, it may be worth considering whether your current approach remains the most effective one.
Look beyond headline interest rates
When reviewing your savings strategy, it’s important to focus on more than just the interest rate on offer. The impact of inflation, how quickly you might need access to the money, and your long-term financial objectives all play a part. A savings account paying a competitive rate may still deliver disappointing real returns once tax and inflation are taken into account.
Time for a review?
If you’ve accumulated substantial cash savings, now could be a good opportunity to review how they’re being held. A well-structured financial plan can help you understand how much cash you need for emergencies and short-term spending, whether you’re making full use of available tax allowances, and whether alternative arrangements might be more suitable for money intended for the longer term.
With savings tax set to increase from April 2027, ensuring your money is working as hard as possible for you is more important than ever.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
Tax treatment depends on individual circumstances and may change in future.