Interest on current accounts and how it is taxed

Some current accounts pay interest on the money sitting in them, and that interest is taxable income in exactly the same way as interest from a savings account. Banks and building societies pay it without taking any tax off first¹, so the amount that appears on your statement is the full amount, and any tax due is worked out afterwards by HMRC.

Most people never pay anything, because of the Personal Savings Allowance: £1,000 of interest each tax year tax-free for basic rate taxpayers, £500 for higher rate taxpayers, and nothing for additional rate taxpayers². People on lower incomes can do better still, thanks to a separate £5,000 starting rate for savings that applies when other income is below £17,570³. This page explains how both allowances work, how interest on a current account fits into them, and how HMRC collects any tax that is owed.

Current account interest is taxable savings income

Interest paid on a current account counts as savings income for income tax purposes, alongside interest from savings accounts, National Savings & Investments products and most other bank deposits. The tax rules make no distinction between the two kinds of account: what matters is that the money is interest paid to you by a bank or building society, not which account it landed in.

Since 6 April 2016, the default position has been that interest is paid gross, meaning without any tax deducted. As TaxAid puts it, "Most interest from banks or building societies is paid without any tax taken off"⁶. Before that date, banks deducted basic rate tax at source from most interest, and taxpayers on lower incomes had to claim the excess back. That system has gone, which is why the amount shown on your statement is the whole amount you earned.

If you want to know how much interest your account is actually paying, you are entitled to ask. Under the FCA's conduct of business rules, a firm should tell a banking customer the current rate of interest that applies to a savings account on the telephone or in a branch, at the customer's request⁷. Banks must also give advance notice of changes to rates, so a rate cut on your current account should not arrive unannounced.

Interest is taxed by reference to the tax year, which runs from 6 April to 5 April the following year¹. Your allowances reset at the start of each tax year, so interest credited on 5 April counts towards the old year's allowance and interest credited on 6 April counts towards the new one. For more on how current accounts work day to day, see how a current account works, and for the differences between the two kinds of account, see current account vs savings account.

Personal Savings Allowance: £1,000, £500 or nothing

The Personal Savings Allowance (PSA) is an annual amount of savings interest that is taxed at 0%. It was introduced on 6 April 2016 by legislation amending the Income Tax Act 2007, which created a new 0% rate, known as the savings nil rate, for savings income⁸. The government's policy statement at the time described it as "a tax-free Personal Savings Allowance (PSA) will be introduced for savings income (such as interest) paid to individuals"⁹.

The amount you get depends on which income tax band your highest income falls into:

The £1,000 figure for basic rate taxpayers is set in legislation: the Finance Act 2016 provides that if none of an individual's income for the year is higher-rate income, the savings allowance for the year is £1,000¹¹. Official statistics summarise the position across all bands: most taxpayers get a PSA of £1,000, higher rate taxpayers get £500, and it is not available to additional rate taxpayers¹².

The allowance applies to each tax year, from 6 April to 5 April the following year¹³. Interest above the allowance is taxed at your usual rate of income tax¹. When the allowance was designed, the government estimated it would be worth up to £200 per year in reduced tax on savings income to basic and higher rate taxpayers¹⁴.

Two things do not use up the allowance: income from an ISA, and savings income that qualifies for the 0% starting rate for savings⁸. That second point matters more than it looks, because it means the starting rate and the PSA stack on top of each other for people on lower incomes, as the next sections explain.

Your tax band decides your allowance, and interest can change your band

The PSA is fixed by band, so the practical question is which band you are in, and that can be affected by the interest itself. Savings interest counts towards your total income, so a large amount of it can push part of your other income into a higher band, or push you over a threshold that changes what you are entitled to.

This works in two directions. If your wages or pension rise and you move from basic rate into higher rate, your savings allowance drops from £1,000 to £500 in the same tax year¹⁵. If your interest income itself is what takes you over the higher rate threshold, the same reduction applies to the interest above that point.

At very high incomes, a separate rule compounds this: the personal allowance is reduced by £1 for every £2 earned over £100,000¹⁵. The Scottish Budget confirms the same taper applies in Scotland, where those earning more than £100,000 see their Personal Allowance reduced by £1 for every £2 earned over that figure¹⁶.

The interaction of frozen thresholds and rising interest rates has pushed more people into paying tax on savings. HMRC estimates reported by Which? put the number of savers paying tax on their interest at more than 2 million in a single year, up from 1.9 million the year before¹⁷. Which? has also calculated what the allowances would have been had they risen with inflation since their introduction: £1,368 for basic rate taxpayers and £684 for higher rate taxpayers, against the frozen £1,000 and £500¹⁷. Those figures are an independent estimate, not the law, but they show the direction of travel: as balances and rates grow, more interest falls outside the allowance.

Earning under £17,570: the starting rate for savings

On top of the PSA there is a second, older allowance aimed at people with little income other than their savings: the starting rate for savings. This is a band of savings income, set at £5,000, that is taxed at 0%¹⁸. The £5,000 figure is fixed in legislation for the tax years 2026 to 2027 up to and including 2030 to 2031¹⁹, and the government confirmed in Budget 2025 that it would be retained at that level²⁰.

The catch is that the £5,000 is not available to everyone. It applies only if your taxable income not from savings or dividends is less than £17,570². That figure is the sum of the standard personal allowance of £12,570 and the £5,000 starting rate band¹⁸. Age UK puts the practical test plainly: if your income, for example from wages or a pension, is more than £17,570 in total, you do not qualify for a starting rate for savings²¹.

For those who do qualify, the £5,000 shrinks as other income rises. Every £1 of other income above the £12,570 personal allowance reduces the starting rate by £1, until it reaches zero¹⁰. TaxAid summarises the same idea: there is a £5,000 starting rate for savings, available only when other income such as employment or pensions is less than £17,570⁶.

For a person with no income other than savings, the three layers stack: £12,570 of personal allowance, £5,000 of starting rate and £1,000 of PSA, which is why guidance for low earners describes a total of up to £18,570 of income before any tax on savings interest²². The SA110 notes make the same point about planning ahead: include an estimate of the savings interest you may earn in the current tax year¹⁸.

Joint accounts: interest split 50/50

Interest on a joint current account or savings account is usually divided equally between the account holders for tax purposes. MoneyHelper states that any interest earned in a joint account will usually be split equally between each person, with tax only due if a person's share takes them above their annual allowance²³. Which? describes the same default: tax on interest earned would typically be split 50:50 between the holders⁴.

The split matters because each holder's share is tested against their own allowances. If one holder is a basic rate taxpayer with the full £1,000 PSA and the other is an additional rate taxpayer with none, the same account produces a tax bill for one and nothing for the other. Each half is simply added to that person's own savings income for the year.

The 50/50 rule also appears in HMRC's own forms. Form P53Z, used to claim back overpaid tax, states that for a joint account only the holder's share, usually 50%, of the interest received is entered²⁴.

There is one way to depart from the default. Where all the money in a joint account actually belongs to one person, HMRC can treat all the interest, and any tax bill, as that person's responsibility, but you need to tell HMRC that all the money is one person's for it to do so⁴. This can arise where one person manages a relative's finances jointly for convenience. For the wider picture of how joint accounts work, see joint bank accounts and joint vs sole bank accounts.

How HMRC collects tax on interest over the allowance

Because banks pay interest gross, tax on anything above your allowances is collected after the event. The system runs on information your bank supplies. After the end of the tax year, your bank or building society tells HMRC how much interest you earned¹. HMRC then adds an estimated amount in your tax code for the current tax year, based on the information given to it by your bank for the previous year¹.

For people who are employed or get a pension, HMRC will usually collect the tax through your tax code¹. The sequence runs roughly a year in arrears: for interest earned in the 2025 to 2026 tax year, HMRC tells you about the tax due in a tax calculation sent during the 2026 to 2027 tax year, and the tax due is usually collected through your tax code in 2027 to 2028¹. These calculations are usually sent between June and the following March after the tax year ends¹.

The Self Assessment route applies above a threshold. If your bank or building society tells HMRC that you have more than £10,000 in savings interest, HMRC will send you a notice to file a tax return, and you need to tell HMRC how much interest you earned on a Self Assessment tax return¹.

If tax has already been taken off any interest received, both the amount received after tax, called net interest, and the amount of tax that was taken are reported⁶. This is now rare, but it can arise with some older products or overseas accounts.

ISAs and the Personal Savings Allowance: how they work together

Interest paid inside an ISA does not count towards your PSA at all. The government's ISA reform factsheet states it directly: "The Personal Savings Allowance does not apply to any growth or interest paid in an ISA"²⁵. NS&I says the same of its own cash ISA: "The interest you earn is tax-free, so it won't count towards your Personal Savings Allowance"²⁶.

This makes the two allowances complementary rather than competing. The PSA covers taxable interest, from current accounts and ordinary savings accounts; the ISA covers interest inside the ISA wrapper. NS&I describes the PSA as "completely separate to the annual ISA allowance and other NS&I tax-free savings"⁵. The ISA itself dates back to 1999, when it replaced earlier tax-advantaged savings schemes²⁷, and you can deposit up to £20,000 each tax year without paying tax on the interest¹⁰. The Consumer Council summarises the attraction in one line: "Individual Savings Accounts offer you tax free interest on savings"²⁸.

One recent change narrows the gap at the edges. The Individual Savings Account (Amendment) Regulations 2026 introduce a charge on any interest paid on cash held in a stocks and shares ISA or an innovative finance ISA²⁹. Where that charge applies, it is handled without any action from the saver: ISA managers will pay the charge to HMRC, and individuals are not required to declare to HMRC any interest paid on an ISA²⁵. Cash ISAs are unaffected: interest on cash held in a cash ISA remains tax-free and outside the PSA.

For most people the practical position is simple. Interest in a current account and ordinary savings accounts uses up the PSA; interest in a cash ISA uses up nothing. Moving money between the two does not change the tax year's ISA allowance once used, so the order of decisions matters. The full picture is in ISAs: a complete guide and savings accounts: a complete guide.

Who does not get the allowance

The clearest exclusion is by band: additional rate taxpayers do not have a Personal Savings Allowance¹⁰. Every pound of taxable interest they receive is taxed at their usual rate, with no tax-free slice. This is confirmed both in NS&I's guidance and in official statistics¹².

Children and young savers are in a different position. Interest on a child's account is taxable in principle, but children have their own allowances, and the PSA applies to them as to anyone else, subject to the rules on parental gifts generating income. Maturing child trust funds are a special case: Which? reported that these accounts remain tax-free, so any interest earned does not count towards the saver's personal savings allowance³⁰.

The wider pressure on the allowance comes from thresholds that stay still while incomes and interest rates rise. The Treasury Committee has warned that reductions in the Personal Savings Allowance would bring many people into paying tax on small amounts of savings income and require Self Assessment forms³¹. Even without reductions, the frozen £1,000 and £500 allowances bite more people each year as balances grow, which is the trend behind the rising count of savers paying tax on interest¹⁷.

For people who find themselves over the allowance, the options are essentially three: hold savings in a cash ISA where the interest is tax-free¹⁰; use the starting rate for savings where other income is low enough⁶; or accept the tax and let HMRC collect it through the tax code. Which? sets out ways to reduce tax on savings interest, including using ISA allowances and the starting rate³². Free, impartial help is available from MoneyHelper guidance on current accounts and from TaxAid for people on low incomes, and the general rules are covered in personal tax in the UK.