Facing 49% tax on savings interest? Four ways to fight back

The Budget contained shock news for savers which emphasises the importance of finding ways to keep the taxman at bay. Individuals work hard to build up wealth and there are ways to be tax savvy.

Additional rate taxpayers are set to pay nearly 50p tax in the pound on cash savings interest from April 2027 when the tax rate on savings interest rises to 49%. Those on the higher rate tax band are close behind at 44p in the pound.

Here are four tax-saving tips to consider so you can keep more of what you earn and have less going to the HMRC.

1. Make the most of tax wrappers

Making the most of the £20,000 annual ISA allowance is paramount, emphasising the importance of the chancellor’s U-turn on cutting the allowance on Cash ISAs. All gains inside any type of ISA – whether from dividends, bond interest or investment growth – are free of UK tax. These benefits should be cherished. Pensions also shield income and capital gains from the taxman.”

2. Transfer assets to a spouse

Consider moving income-producing assets from the higher-tax-paying individual to the lower-tax-paying spouse. You can gift as much money as you want to a partner without being subject to inheritance tax if they live in the UK permanently and you are either married or in a civil partnership.

For example, additional rate taxpayer Lucy gifts £50,000 cash to her husband, John, who is a basic rate taxpayer. Any interest from this gifted cash is then taxed at John’s marginal rate, which will be 24% from 6 April 2027, with nothing paid on the first £1,000 earned in a year as per the personal savings allowance. That’s less than half the 49% tax rate at which Lucy will pay from next April.

Note that additional rate taxpayers have no savings tax allowance at all, while higher rate individuals can receive up to £500 a year in savings income before paying tax.

3. Consider Premium Bonds

In an average month, the typical bond holder will win nothing, but the more you hold, the more chance you have of a win. The current prize fund rate is 4.35%, but it doesn’t translate as interest earned on the amount you hold in the same way as interest rates in a savings account. It’s effectively down to luck, with diminishing returns for those with lower holdings.

For most people, this doesn’t stack up well against a competitive easy-access savings account if the interest they earn isn’t subject to tax. However, for anyone paying tax on a chunk of their savings interest – particularly higher or additional rate taxpayers – the allure of Premium Bonds starts to make more sense, because of the tax-free status of the prizes.

4. Consider short-dated low coupon gilts

Investing in UK government bonds (gilts) could be advantageous for higher-rate and additional-rate taxpayers as they seek to keep more of what they earn.

Short-dated low coupon gilts could be the answer for those who have already maxed out their ISAs and want more flexible access for part of their wealth compared to a pension.

While the Budget’s shock news focused on savings income tax, short-dated low coupon gilts now have greater appeal. While investors will still have to pay tax on coupons paid out by the government bonds, most people don’t buy these types of gilts for income. Instead, the real prize is the capital gain which is tax-free on all gilts.”

How it could work in practice

Many short-dated, low-coupon gilts trade below their £100 redemption value. For example, let’s say someone buys a 0.5% gilt for £90 per bond on 6 April 2027 when the new tax rates kick in, with exactly two years left until maturity. At maturity, the government repays £100 for every gilt held, giving the investor a £10, or 11.1%, capital gain per bond that is free from capital gains tax.

The investor would also receive £1 of coupon payments per gilt over the two years. After 49% income tax, an additional-rate taxpayer would keep 51p per gilt, taking their total profit after tax over the two years to £10.51 for each gilt bought at £90.

For comparison, if an additional-rate taxpayer put £90 into a savings account and left the interest to compound for two years, they would need a headline savings rate of around 11% a year to end up with roughly the same amount after paying 49% tax on the interest.

Gilts are also subject to dealing costs when you buy and sell, which means the tax strategy is only worth it if larger sums of money are invested, rather than buying a single bond.

Gilts can be sold on the open market, which means the investor has more flexibility if they need the money versus cash savings accounts that lock up your money. However, the investor does run the risk of not getting a price anywhere close to par value (i.e. £100) unless they are selling very close to the maturity date.

Gilts are an investment and are not directly comparable from a risk perspective to cash savings. There is the risk of the government not making the interest payments or redeeming the bonds at maturity, although it has never defaulted on such commitments.