How savings interest fits into your income tax

Savings interest counts as income for tax purposes, but most people never pay tax on it. Interest is paid "gross", meaning without any tax taken off, and each person can earn a set amount of it tax-free each tax year: £1,000 for basic rate taxpayers through the Personal Savings Allowance, £500 for higher rate taxpayers, and nothing for additional rate taxpayers¹. On top of that, people on lower incomes can have up to £5,000 of savings interest taxed at 0% through the starting rate for savings².

Any interest above your allowances is taxed at your usual rate of Income Tax¹. You do not normally have to do anything to claim the allowances: banks and building societies report your interest to HMRC after the tax year ends, and HMRC collects any tax due through your tax code, by Simple Assessment, or through Self Assessment if your interest is more than £10,000¹.

Savings interest is taxed as income, at your usual rate

Interest on savings is a form of income, and HMRC's guidance is plain about what happens to it: "You pay tax on any interest over your allowance at your usual rate of Income Tax"¹. For most people that means 20% if they are basic rate taxpayers, 40% at higher rate, or 45% at additional rate⁵. The charge only applies to the interest above your tax-free allowances, not to all of it.

The legal structure behind this sits in the Income Tax Act 2007. Section 11D charges income tax at the savings basic rate on an individual's income which is saving income and would otherwise be charged at the basic rate, with matching provisions for the savings higher rate and the savings additional rate⁶. In other words, savings interest has its own set of rates in legislation, but they mirror the ordinary bands, which is why HMRC describes the outcome simply as your "usual rate"¹.

The order in which your income is taxed matters here. Savings interest is treated as the top slice of income, after wages, pensions and other earnings, so the rate you pay on interest depends on everything else you receive in the year. HMRC's internal manual explains that where savings income falls within the starting rate band, "income tax is charged at the 'starting rate for savings, which is 0% (ITA07/S7)'"⁷. The dedicated page on in what order savings and dividend income are taxed covers this stacking in detail.

Because interest is the top slice, a rise in interest rates or a larger savings pot can push part of your interest into a higher band without anything else changing. That is one reason the number of people owing tax on savings has grown: banks and building societies send savings interest data to HMRC after the end of the tax year, and HMRC then adjusts people's tax codes⁸.

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

The Personal Savings Allowance was introduced in 2016 as a tax-free allowance for savings income paid to individuals⁹. Its size depends on which tax band your income falls into:

Basic rate taxpayers can receive £1,000 of interest without paying tax, and those on lower incomes can also use it: the allowance is available to people who pay no income tax at all as well as basic rate taxpayers¹¹. Higher rate taxpayers get £500¹². Additional rate taxpayers get nothing: official statistics on tax reliefs state plainly that "PSA is not available to additional rate taxpayers"¹⁰.

The band that matters is the one your income falls into after everything, including the interest itself, is counted. That creates a trap worth understanding. If a large amount of interest tips you from basic rate into higher rate, your allowance drops from £1,000 to £500 at the same time as the excess interest becomes taxable at the higher rate. Interest also counts towards the £100,000 income level above which your Personal Allowance starts to be reduced², a mechanism covered on the page about losing your Personal Allowance above £100,000.

The allowance applies to each tax year, from 6 April to 5 April the following year¹³, and it cannot be carried forward: interest you could have earned but did not does not create a bigger allowance next year. A parliamentary committee examining the allowance noted that "reductions in the Personal Savings Allowance would bring many people into paying tax on small amounts of savings income" and would require Self Assessment forms¹⁴, which is why the level at which it is set is watched closely when budgets are announced.

Starting rate for savings: up to £5,000 at 0%

The starting rate for savings is a separate band that sits below the Personal Savings Allowance and helps people whose non-savings income is small. Official guidance describes it like this: "For those on lower incomes, the Starting rate for savings lets you get up to £5,000 of savings interest before paying tax"². The rate applied to savings income within this band is 0%¹⁵.

The £5,000 is not a flat entitlement. It is reduced by £1 for every £1 of other income above the Personal Allowance, which is £12,570². As NS&I's guidance puts it, "Every £1 earned over the £12,570 Personal Allowance reduces the £5,000 starting rate by £1 until it's zero"². The practical cut-off is £17,570 of other income: "the starting rate for savings won't be relevant to you if your other income is £17,570 or more"².

Two examples show how the taper works:

• Someone earning £15,000 a year has £2,430 of income above the Personal Allowance, which reduces the £5,000 starting rate to £2,570 of tax-free savings interest⁸.
• Someone earning £10,000, whose income is below the Personal Allowance, keeps the full £5,000 starting rate, and can earn £6,000 of savings interest in the tax year before paying any tax once the Personal Savings Allowance is added¹¹.

The legislation behind the band works by comparing your non-savings income with the starting rate limit: where non-savings income is less than the limit, savings income is taxed at the starting rate up to that limit, and where non-savings income exceeds it, the starting rate is not available¹⁶. The limit has been set at £5,000 in legislation since the 2023-24 tax year¹⁷, and the government confirmed in Budget 2025 that it will stay at £5,000 for the tax years 2026 to 2027 up to and including 2030 to 2031¹⁸.

How much interest can you earn tax-free?

Adding the pieces together, the maximum tax-free savings interest depends on your other income. For someone with no other income at all, the bands stack up like this:

For someone with income equal to or less than the Personal Allowance, the first £5,000 of savings interest is covered by the starting rate and the next £1,000 by the Personal Savings Allowance¹¹. As other income rises, the starting rate shrinks pound for pound, but the Personal Savings Allowance stays intact until your overall income pushes you into the higher rate band, where it halves to £500³.

Most people can earn up to £1,000 in savings interest before paying tax²⁰, and current accounts that pay interest are covered by the same allowance²¹. The practical question for many savers is how much money that represents. The answer depends on interest rates, which change, so the useful figure to hold onto is the allowance itself: £1,000 for a basic rate taxpayer, £500 at higher rate, plus whatever remains of the starting rate band on lower incomes.

Interest earned inside an ISA sits outside this calculation entirely. Savings in tax-free accounts like Individual Savings Accounts do not count towards the allowance²², so money in a cash ISA can earn interest without using any of your tax-free headroom. The page on ISAs covers how they work.

What counts as savings interest, and what does not

Savings interest means interest paid on money held in savings accounts, current accounts and savings bonds. Providers pay it gross, without deducting tax, and it then counts towards your allowances. NS&I's Direct Saver, for example, states: "We add your interest without deducting any tax. However, the interest is taxable so it will count towards your Personal Savings Allowance"²³. The same treatment applies to its Guaranteed Income Bonds²⁴.

Fixed-rate savings bonds follow the same rule. MoneyHelper's guidance on cash savings bonds states: "Interest on your savings is paid gross, and you might have to pay tax on it if it's above your Personal Savings Allowance", and notes that some savings bonds are available within a tax-free ISA²⁵.

What does not count is interest paid inside an ISA. NS&I's Direct ISA states: "The interest you earn is tax-free, so it won't count towards your Personal Savings Allowance"²⁶. The same applies to a Junior ISA, where "the interest earned is tax-free, so it won't count towards the child's Personal Savings Allowance"²⁷. Official guidance on ISA reform confirms the principle: "The Personal Savings Allowance does not apply to any growth or interest paid in an ISA"⁴.

One area that is changing is interest on cash held inside a stocks and shares ISA or an Innovative Finance ISA. The Individual Savings Account Regulations 1998 have long provided for a flat-rate charge to tax on interest on cash deposits held under a stocks and shares component or insurance component²⁸, and the Individual Savings Account (Amendment) Regulations 2026 introduce a charge on any interest paid on cash held in these ISAs²⁹. Under the draft legislation, the account manager must pay HMRC an amount representing income tax at the savings basic rate in force for the year, and no relief from tax applies to such interest³⁰. This is a charge on the account, not on your personal allowance, and it is covered further in the section on upcoming changes below.

Joint accounts, children and Scottish taxpayers

Joint accounts. Interest earned in a joint account is usually split equally between the account holders. MoneyHelper's guidance states: "Any interest you earn 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 allowance²⁰. Each holder then applies their own Personal Savings Allowance to their half of the interest, so a basic rate taxpayer can earn £1,000 of savings interest a year tax free, and a higher rate taxpayer £500, while additional rate taxpayers get no allowance²⁰.

Children's accounts. Children have their own allowances, so interest on a child's savings is taxed as the child's income, not the parent's. There is one exception for money given by a parent: under the £100 rule, if interest on money given by a parent exceeds £100 in the tax year, "all of this interest (not just the amount over £100) will be added to your savings income, and taxed as if it were your own"¹¹. A child whose own income is at or below the Personal Allowance can earn up to £5,000 of savings interest tax-free through the starting rate, plus the £1,000 Personal Savings Allowance¹¹.

Scottish taxpayers. Scotland sets its own rates and bands for non-savings income, but savings interest is not part of that. HMRC's guidance is direct: "You'll pay the same tax as the rest of the UK on dividends and savings interest"³¹. Scottish Income Tax applies to wages, pensions and most other taxable income, including self-employed profits, rental income and taxable benefits such as the State Pension³², and the Scottish government confirms it applies to all non-savings, non-dividend income of Scottish taxpayers³³. Your Personal Savings Allowance is still based on the UK-wide rules². The interaction between Scottish bands and UK savings rates is covered on the page about income tax bands and rates.

How HMRC collects tax on savings interest

You do not normally pay tax on savings interest as it is earned. Interest arrives gross, and the tax, if any, is worked out afterwards:

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 to your tax code for the current tax year, based on the interest information reported for the previous year¹. For people who are employed or get a pension, "HMRC will usually collect the tax through your tax code"¹. The tax calculations are usually sent between June and the following March after the tax year ends¹.

As a worked example of the timing: tax due on savings interest earned in the 2025 to 2026 tax year is told to you in a tax calculation sent during the 2026 to 2027 tax year, and the tax is usually collected through your tax code in 2027 to 2028¹.

You can see the estimated amount HMRC has put in your tax code in your Personal Tax Account¹. If you do not have a tax code, or it cannot be changed, HMRC may send a Simple Assessment letter instead¹. HMRC has urged customers not to ignore Simple Assessment letters, which can be issued where there is tax to pay on interest on savings or dividends³⁴. The page on Simple Assessment explains how those letters work and the deadlines for paying them.

Over £10,000 in interest: Self Assessment

The reporting rules change above a threshold. If your savings interest is more than £10,000, you need to tell HMRC how much interest you earned on a Self Assessment tax return¹. If your bank or building society tells HMRC you have more than £10,000 in savings interest, HMRC will send you a notice to file a tax return¹. And if you do not already complete a Self Assessment tax return, you will need to register¹.

For interest of £10,000 or less, the position is different: after the end of the tax year, your bank or building society tells HMRC how much interest you earned, and no return is needed for the interest alone¹. People who are already registered for Self Assessment report any interest earned on savings there, whatever the amount¹.

The registration process and the deadlines for filing and paying are covered on the pages about Self Assessment and when and how to register. HMRC also offers a checking tool you can use to see whether you have to pay tax on savings interest and how the tax is worked out, though the service requires you to have tax code 1257L³⁵.

Frozen allowances and upcoming changes to income tax rules

Two things are happening to the world around these allowances: thresholds are frozen, and the rates charged on savings interest are set to rise.

Frozen thresholds. The government confirmed in Budget 2025 that the starting rate for savings limit stays at £5,000 for the tax years 2026 to 2027 up to and including 2030 to 2031¹⁸. Income tax thresholds more widely are frozen, which means that as incomes and interest earnings rise, more people cross into the higher rate band and see their Personal Savings Allowance cut from £1,000 to £500. Savings interest made up 2.0% of total income tax liabilities in 2023 to 2024³⁶, a small share overall, but one that falls on people who may never previously have owed tax on savings.

Higher rates on savings interest from 2027. From 2027, income tax on savings interest will rise by two percentage points. A basic rate taxpayer will face a 22% charge, higher rate taxpayers will pay 42%, and those in the additional rate band will pay 47%⁸. HMRC's own guidance confirms the direction of travel, stating that the savings higher rate "will be increased to 42%" for the tax year 2027 to 2028³⁷. These are rates on the interest above your allowances, not on the allowances themselves, which continue to shelter the first £1,000 or £500.

A charge on cash inside investment ISAs. 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. Under the new rules, the account manager must pay HMRC an amount representing income tax at the savings basic rate in force for the year, no relief from tax applies to such interest, and no repayment of tax may be made to the investor receiving it³⁰. This extends a principle that has applied since the original ISA regulations of 1998, which provided a flat-rate charge on interest on cash deposits held under a stocks and shares or insurance component²⁸.

Ordering rules from April 2027. From April 2027 the personal allowance will be deducted against employment, trading and pension income first, before savings and dividend income, without changing how the Personal Savings Allowance itself may be used. This changes the arithmetic of which band your interest falls into for some taxpayers, so it is worth revisiting your position when the new rules arrive.

Where to get help

If you think HMRC has your savings interest wrong, the first stop is your Personal Tax Account, where you can see the estimated amount in your tax code¹. HMRC also publishes a checking tool for tax on dividends and savings interest³⁵. If you have tax to pay and no letter has arrived by 31 March of the following tax year, contact HMRC directly¹.

For free, impartial help with money questions, MoneyHelper offers guidance on savings products and joint accounts²⁰. The pages on claiming a tax refund, complaining about HMRC and checking your tax code cover the practical steps when something has gone wrong, and the savings section explains the accounts themselves.