There were quite a few small changes in the budget and it was nice to see that the 12k Cash ISA limit and 22% tax on interest inside ISAs was dropped. However, it also announced a total of a 4% rise of tax on interest for next year.
- Unchanged: dividend rates of 10.75%, 35.75% and 39.35% in 2027/28.
- Unchanged: the £500 dividend allowance in 2027/28.
- From 6 April 2027: savings income rates of 24%, 44% and 49%, to be set in the Finance Bill 2026-27.
- From 6 April 2027: property income rates of 24%, 44% and 49% in England, Wales and Northern Ireland.
- Unchanged: the £12,570 Personal Allowance, £37,700 basic rate band, Personal Savings Allowance and £5,000 starting rate for savings.
- Unchanged: Corporation Tax at 19% and 25%, with £50,000 and £250,000 profit thresholds.
- Consultation: a new framework for company distributions, with draft legislation in 2027 for April 2028.
- £3000 trading allowance in 2027/28 (up from £1000).
This means your bank, savings and brokers accounts which pay you interest will be taxed at 24% for a basic rate tax payer, 44% for a higher rate tax payer and 49% for a high rate tax payer.
The £1k allowance for a basic rate tax payer drops to £500 and then £0 allowance for higher rate tax payers (unchanged).
Why buying a Money Market Fund is not the answer!
If we just look at a Basic rate tax payer that has exceeded their £1k interest allowance and is holding a pot of cash (perhaps from an inheritance, sale of business or property, building a pot for house purchase, etc.), we can see that where we park that uninvested cash can make quite a difference...
| Pot | Product | Before tax | Tax rate | Tax | After tax |
|---|---|---|---|---|---|
| £10,000 | Bank account @ 1% | £100 | 24% | £24.00 | £76.00 |
| £10,000 | T212 cash interest @ 3.8% | £380 | 24% | £91.20 | £288.80 |
| £10,000 | MMF @ 3.8% | £380 | 18% | £68.40 | £311.60 |
| £20,000 | Bank account @ 1% | £200 | 24% | £48.00 | £152.00 |
| £20,000 | T212 cash interest @ 3.8% | £760 | 24% | £182.40 | £577.60 |
| £20,000 | MMF @ 3.8% | £760 | 18% | £136.80 | £623.20 |
| £50,000 | Bank account @ 1% | £500 | 24% | £120.00 | £380.00 |
| £50,000 | T212 cash interest @ 3.8% | £1,900 | 24% | £456.00 | £1,444.00 |
| £50,000 | MMF @ 3.8% | £1,900 | 18% | £342.00 | £1,558.00 |
So, at first sight, keeping £50k in cash in a Trading 212 Invest GIA will cost you £456 in tax, versus £342 if you put the same cash in a Money Market fund such as CSH2.
However, because a MMF like CSH2 is a cash fund, it's ERI must be classed as interest not a dividend.
Distributions in 25/26 Tax Year
ISIN Ticker Type Tax Dist. date Qty ERI/unit Fx ERI GBP Held on Fund name
LU1230136894 CSH2 acc Int 31/03/2026 10 32.5745 0.8683 282.84 30/09/2025 Amundi Smart Overnight Return - GBP Hedged UCITS ETF Acc
Foreign DIVIDEND ERI for 25/26 = £0.00
Foreign INTEREST ERI for 25/26 = £282.84
Total ERI for 25/26 = £282.84
FOREIGN INTEREST - ERI totals by ISIN country/prefix (information only):
LU (Luxembourg) = £282.84 (LUX)
FOREIGN DIVIDENDS - ERI totals by ISIN country/prefix (information only):
None.
So some of the gain it makes is taxed as interest at the rate of 24%.
Here is a buy of 10 shares at £1000 each, after a year we sell for a 3.8% profit
B 6/4/2025 CSH2 10 1000 0 0
S 5/4/2026 CSH2 10 1038 0 0
However, if we work out the ERI for 10 units held on 30/09/2025, we must also add the ERI onto the cost price...
DIVIDEND 30/09/2025 CSH2 10 282.84
This will be added onto the cost of the fund, so the net gain for CGT is much less than £400...
ukcgt.xyz gives us
Tax year summary
================
Year Disposal proceeds Allowable costs Net Gain/Loss
2025/26 £10,380 £10,283 £97
# ASSET EVENTS ADDED TO POOL COST (e.g. notional ERI from ETFs all dates)
30/09/2025 CSH2 £282.84 ERI\Dividend added onto 10 pooled shares
Disposal calculations
=====================
1. SOLD 10 CSH2 on 05/04/2026 (2025/26) (unknown)
Disposal proceeds: £10,380.00
Allowable costs: £10,282.84
Gain/loss: £97.16
Matches:
- Section 104: 10; proceeds £10,380.00 - cost £10,282.84 = £97.16
So we pay 18% CGT on £97 (£17.46) and 24% tax on the interest part £282.84 (£67.8), giving us a tax bill of £85.26 which is not quite the £68.40 it would have been at just 18% if it was all capital gain.
However, we can still beat the tax man by simply selling our CSH2 shares just before the reporting date of 30 September and leaving it as cash for over 30 days (gaining T212 interest), and then rebuying CHS2 again in November. That way, any gain is treated as capital gain and taxed at 18% instead of a lot of it being taxed at 24% and classed as interest.
These ERI rules are really stupid!
This might save approx. £20 of tax for each £10k we save/invest but that does not include the Buy/Sell price difference we will incurr when buying and selling the fund - so it is hardly worth the trouble!
Higher rate tax payers will pay 44% on the interest part but only 24% on the capital gains part, so it might be worth doing. So they pay 24% CGT on £97 (£23.28 ) and 44% tax on £282.84 (£124.44), giving a tax bill of £147.73 on our £380 gain vs the £91.20 it would be if it was taxed at a flat 24% and was all capital gain (e.g. if we sold before the Reporting date we would have a tax saving of £56 per £10k invested on a £380 gross profit).
Losing almost half your gains when you are just trying to save your cash seems almost like robbery. The way around used to be to buy 'safe' dividend paying stocks, but for a higher rate tax payer, the dividend tax for 2027 is 35.75% - almost as bad as 44%.
UK inflation is in the 3%-4% area - compare this with the effective interest rate of 3.8% (2.9% or 1.7% or 1.9% after basic/higher/highest tax) and anyone holding cash is losing wealth in real terms.
Buying property for investment and letting now seems very unattractive too.
For those that don't want to take the risk of investing in shares for gains rather than interest or dividends, it seems we have little choice. Treasury Gilts (no CGT but the coupon is taxable) or Premium Bonds (up to 50k) perhaps?
We still have the option of contributing to a SIPP (if we are still earning wages) or gifting the cash to our kids or grandkids rather than half of it going to the government to waste.
The government wants to encourage more houses to be built, so why not give tax breaks for investors that want to build houses and offer a guaranteed return?
The good news is that anyone who has a side-hustle, such as YouTube, Etsy, selling e-books, websites with ads, etc. won't be taxed on the first £3000 of profit next year. To a higher rate tax payer that is a tax saving of £880.
Summary
- This budget may nudge more people into investing their savings rather than leaving it as cash.
- The ISAs have been untouched and new ones are to be added for first time house buyers.
- CGT rates have not been changed.
- The sole-trader allowance has been upped from £1k to £3k saving £880 in the tax next year.
Hopefully, this will encourage more people to invest and start a side hustle.
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