How savings interest is taxed
Interest from most savings counts as income, but several allowances usually stand between your interest and any tax. The most important is the personal savings allowance, which lets many people earn a chunk of interest each year with no tax to pay. How much you get depends on your tax band.
A basic rate taxpayer has a personal savings allowance of £1,000. A higher rate taxpayer has £500. An additional rate taxpayer has no personal savings allowance at all, so all of their savings interest is potentially taxable. The allowance applies to interest from bank and building society accounts and many other savings, but not to interest earned inside an ISA, which is always free of tax.
For most savers this means modest amounts of interest are tax free, but a large cash balance earning a good rate can easily produce more interest than the allowance covers. Our guide to tax planning explains how this fits with the other allowances available across a tax year.
The starting rate for savings
On top of the personal savings allowance there is a separate relief called the starting rate for savings. This can give up to £5,000 of savings interest with no tax to pay, but it is aimed at people with low income from other sources, such as wages or a pension.
The way it works is that the £5,000 band is reduced by your other taxable income above the personal allowance. The more you earn from non savings sources, the smaller the starting rate band becomes, and for many working people it is reduced to nothing. But for someone with little or no other income, such as a person living off savings, it can shelter a substantial amount of interest.
The starting rate for savings sits alongside the personal savings allowance, so the two can combine to let people with low other income earn a large amount of interest tax free. Working out exactly how much applies can be fiddly, which is where careful calculation helps.
A worked example
A higher rate taxpayer with £900 of interest
Sara is a higher rate taxpayer and earns £900 of interest on her savings this tax year. As a higher rate taxpayer her personal savings allowance is £500, so the first £500 of her interest is tax free. The remaining £400 is taxed at her normal income tax rate of 40 percent, which produces a tax bill of £160. Because she has a high income from her job, the starting rate for savings does not help her, as it has been reduced to nothing by her other income. If Sara had instead held the savings inside an ISA, the whole £900 would have been free of tax.
The key point is that only the interest above your allowance is taxed, and it is taxed at your normal rate, not a special savings rate. For Sara that is 40 percent, but for a basic rate taxpayer in the same position the excess would be taxed at 20 percent instead.
When and how the tax is collected
If you owe tax on savings interest, HMRC usually collects it without you having to send a payment yourself. Banks and building societies report the interest they pay you, and HMRC often adjusts your tax code so the tax is taken through your wages or pension over the year.
If you already complete a Self Assessment tax return, the interest goes on the return and is taxed through that. If your savings income is large, or your affairs are more complex, you may need to file a return where you did not before. It is worth checking, because the responsibility to report taxable interest rests with you even if no one asks for it.
One way to stop the tax arising at all is to move savings into a tax free wrapper. Our guide to ISAs explains how interest inside an ISA stays completely free of tax and off your return. When you want help getting the position right, you can start your quote.
Common mistakes
The most common mistake is assuming all savings interest is tax free. The personal savings allowance covers a set amount, but interest above it is taxable, and additional rate taxpayers have no allowance at all. As rates have risen, many savers have crossed the line without realising.
Another error is forgetting that the starting rate for savings is reduced by your other income, so people with normal wages often cannot use it even though they have read about the £5,000 figure. Assuming it always applies can lead to a nasty surprise.
People also forget that joint accounts split the interest between the holders for tax, and that ISA interest never counts towards any of these allowances because it is already tax free.
What you should do
Add up the interest you expect to earn this tax year and compare it with your personal savings allowance, which is £1,000 at basic rate, £500 at higher rate and nothing at additional rate. If your interest is likely to exceed your allowance, work out whether the starting rate for savings can help, bearing in mind it is reduced by your other income.
If you are heading for a tax bill on interest, consider moving cash into an ISA so future interest is sheltered, and check that your tax code or tax return reflects the position correctly. Keeping records of the interest each account pays makes this much easier.
We can calculate exactly how much of your interest is taxable, make sure it is reported correctly and suggest tax efficient ways to hold your savings, while leaving the choice of accounts to a regulated financial adviser. To get started, start your quote.
A clear guide to how savings interest is taxed in 2026/27, covering the personal savings allowance, the starting rate for savings and how any excess is taxed.
Frequently asked questions
How much savings interest can I earn tax free?
It depends on your tax band. A basic rate taxpayer has a personal savings allowance of £1,000, a higher rate taxpayer £500 and an additional rate taxpayer nothing. People with low other income may also benefit from the starting rate for savings, which can give up to a further £5,000 tax free.
What is the starting rate for savings?
It is a separate band of up to £5,000 of savings interest with no tax to pay, aimed at people with low income from other sources. The band is reduced by your taxable income above the personal allowance, so the more you earn from wages or a pension, the smaller it becomes, often reaching nothing.
How is tax on savings interest collected?
Banks and building societies report the interest they pay, and HMRC often collects any tax due by adjusting your tax code so it is taken through your wages or pension. If you complete a Self Assessment return, the interest is reported and taxed through that instead.
Do I pay a special rate of tax on interest?
No. Interest above your allowances is taxed at your normal income tax rate, so a basic rate taxpayer pays 20 percent on the excess, a higher rate taxpayer 40 percent and an additional rate taxpayer 45 percent. There is no separate savings tax rate for the amount above your allowance.
Does interest inside an ISA count towards my allowance?
No. Interest earned inside an ISA is free of tax and does not count towards your personal savings allowance or starting rate for savings. It also does not need to be reported on your tax return, which is one reason ISAs are popular with savers facing a tax bill on interest.