Top-rate taxpayers who still want to save the maximum cash Isa allowance of £20,000 every year after April 2027 face bills as high as £9,000.

Rachel Reeves reduced the amount that those aged under 65 can save into their cash Isa tax-free from £20,000 to £12,000 in her budget last week. The changes, which come into effect in April 2027, are intended to encourage those with cash savings to invest their money instead.

This could cost an additional-rate taxpayer £9,349 in tax over ten years, according to the investment firm AJ Bell. Over five years, it would cost them £2,380. The analysis assumes they still wish to save £20,000 a year and put the remaining £8,000 every year into a savings account with 4 per cent interest.

Additional-rate taxpayers, those who earn more than £125,140, have no tax-free savings allowance and are charged 45 per cent tax on any interest. Higher-rate taxpayers, who have a £500 tax-free personal savings allowance and pay 40 per cent on their interest, would pay £1,152 in tax over five years. This would rise to £6,464 over ten years. A basic-rate taxpayer, who has a £1,000 allowance, would stand to lose £240 over five years and £2,402 in ten.

However, in the budget the chancellor also raised the rate of tax on savings interest. From April 2027 additional-rate taxpayers will pay 47 per cent. Higher-rate payers will pay 42 per cent, up from 40 per cent, and basic-rate taxpayers will pay 22 per cent, up from 20 per cent. AJ Bell has factored this into its calculations.

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Laura Suter from AJ Bell said: “The decision to cut the cash Isa allowance for those under the age of 65 is going to lead to bigger tax bills for the nation. It’s being badged up as trying to incentivise people to get into investing. In reality the move is also likely to be a huge cash cow for the government.”

Income tax thresholds were frozen in the budget for a further three years until 2031. As inflation pushes up wages, millions of workers will be dragged into paying higher rates of tax on their savings.

HMRC and the Treasury were contacted for comment.