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Thousands of UK workers are set to face an effective 64 per cent tax rate on their cash savings under a fresh tax raid launched by John Healey in his maiden Budget.
The Chancellor confirmed he will hike taxes on savings by a further two per cent in April 2027, taking the rate to 44 per cent and 49 per cent for higher and additional rate taxpayers respectively.
He also maintained the frozen tax thresholds implemented by his predecessor Rachel Reeves, including the longstanding personal allowance taper. If a worker’s income exceeds £100,000 the tax-free personal allowance is reduced by £1 for every £2 earned over the limit.
For employees paying 40 per cent income tax on their salary, this clawback adds a further 20p of tax for every £1 of interest received.
Brits caught in the taper pay an effective 60 per cent marginal rate on savings interest above their allowance, but the incoming tax hike will see this penalty rise to 64 per cent.
Tax trap paradox
For Britain’s highest earners the measure creates far less distortion compared to those who find themselves close to the threshold.
Workers earning £200,000 have their personal allowance completely wiped out by their salary alone. This means additional savings interest cannot trigger any further tax clawback, leaving them to be taxed solely at the flat 49 per cent rate.
Instead workers on the lower end of the bracket, typically dubbed high earners not rich yet (HENRYs) are instead expected to bear the brunt of the increase.
HENRYs earning £110,000 land directly in the taper zone with a £500 personal savings allowance.
Every pound of savings interest above the £500 triggers the 44 per cent higher-rate savings tax while simultaneously stripping away 50p of their personal allowance.
The lost allowance exposes an extra 50p of salary to 40 per cent income tax, creating the “punishing” 64 per cent effective marginal rate and putting the rate they face 15 percentage points higher than someone earning nearly double their pay.
Michael Healy, chief executive of IG consumer, said: “The £100,000 threshold has become one of the most punishing features of Britain’s tax system.
“Years of frozen thresholds have dragged more working professionals into its grip, and the Chancellor has now tightened the squeeze.”
Childcare cliff edge
The tax hike puts further pressure on HENRYs, including those who have lost their free childcare hours upon surpassing the £100,000 earnings threshold.
In dual households, individual salaries are taken into account meaning childcare hours are taken the moment one parent crosses the £100,000 line regardless of what the other earns.
Over 90 per cent who have crossed the threshold have argued it has left them unable to build long-term wealth or invest, according to IG.
More than half said they would invest more if crossing the threshold did not cost them free childcare.
“Higher taxes on savings risk undermining efforts to encourage more people to invest,” said Healy.
“Families already struggling with punitive tax rates and the loss of childcare support will have even less disposable income to put towards building long-term wealth. The result is a tax system that makes it harder for people to get ahead financially.”
