Actions to Take Before 2% Income Tax Increases on Cash Interest
Published / Last Updated on 13/02/2026
As you may be aware, in the Spring 2026 Budget, Rachel Reeves announced new ‘savings income tax’ increases by
- 2% for Dividend Income from April 2026
- 2% for Property Rental Income/profit from April 2027
- 2% for Savings Interest Income from April 2027.
This means that interest earned on cash/deposit savings (outside your savings allowances and ISA allowances) will pay 22% (basic rate), 42% (higher rate) and 47% (additional rate).
We Have Looked at 2 Scenarios
- Converting your mortgage to an offset mortgage account.
- Moving cash deposits to pension funds to attract tax relief and tax-free growth.
Converting to an Offset Mortgage
- An offset mortgage is like any other mortgage in that you borrow money and you pay back a proportion of interest charges and capital each month.
- The difference is you have an offset savings deposit account sitting alongside your mortgage.
- No interest is paid on your savings account but the amount of interest charged on your mortgage outstanding each month is reduced by the amount of cash deposit savings you have.
- E.g., You have a repayment mortgage of £100,000 at a rate of 5% pa and £50,000 sat in your ‘emergency’ savings ‘offset’ deposit account.
- You do not receive interest meaning you do not pay Savings Income Taxes of 22%, 42% or 47%.
- The interest added to your mortgage account is based upon your net debt with the lender (£100,000 less £50,000). Meaning you have only been charged interest on £50,000.
- Your monthly mortgage payment is still paid for a normal mortgage of £100,000.
- This means a greater proportion of your monthly mortgage payment now reduces your mortgage balance outstanding rather than being lost in interest rates.
- This means you pay off your mortgage faster.
- You can access your savings account at any time for capital.
- Ask yourself the question ….
- What is the point of me earning 3% interest in my deposit account and then paying 22%, 42% or 47% income tax, meaning a real net return of 2.34%, 1.74% and 1.59% respectively?
- When I can offset against my 5% mortgage and get a real return equivalent of 6.10%, 7.10% and 7.25% respectively? This is the equivalent gross interest rate you would need to be earning on your separate savings deposit account to match the savings of a 5% offset mortgage.
Pension Saving Instead
The same can be said for pensions
- Why would you hold bank deposit/cash savings earning 3% gross (net return of 2.34%, 1.74% and 1.59% after taxes), when you could invest in a pension scheme, get tax relief at 20%, 40% or 45% and all your fund grows tax free?
- You would build up an even bigger pension fund with a bigger tax-free lump sum, that you then use to pay your mortgage off even quicker if you still have a mortgage in your late 50s.
Cash ISA – Not A Consideration as Allowances Being Cut
- The cash ISA allowance for 18–65-year-olds has been reduced from £20,000 to £12,000 from April 2027.
| Mortgage Rate & Equiv. Offset Saving | ||||
| Savings Income Tax Rate | 3% | 4% | 5% | |
| BRT | 22% | 3.66% | 4.88% | 6.10% |
| HRT | 42% | 4.26% | 5.68% | 7.10% |
| ART | 45% | 4.35% | 5.80% | 7.25% |
| Pension Growth Rate * | ||||
| Pension Tax Relief Rate | 4% | 7% | 9% | |
| BRT | 20% | 4.80% | 8.40% | 10.80% |
| HRT | 40% | 5.60% | 9.80% | 12.60% |
| ART | 45% | 5.80% | 10.15% | 13.05% |
| *4% pa ( 5% less 1% charge) is standard, mid rate growth assumption | ||||
| ISA Growth Rate ** | ||||
| ISA Tax Rate | 4% | 7% | 9% | |
| BRT | 0% | 4.00% | 7.00% | 9.00% |
| HRT | 0% | 4.00% | 7.00% | 9.00% |
| ART | 0% | 4.00% | 7.00% | 9.00% |
