How savings interest is taxed
For years, savings interest was so small that tax on it was a non-issue for most people. Then interest rates climbed — and suddenly a chunk of ordinary savers are earning enough interest to owe tax without realising it. The good news: the rules are generous and simple once you know them. Here’s exactly how savings interest is taxed in 2026/27.
This is information, not financial advice. It explains the current tax rules for savings interest. Your own position depends on your total income.
The Personal Savings Allowance
The main rule is the Personal Savings Allowance (PSA) — a chunk of savings interest you can earn each year completely tax-free. How much depends on your income tax band:
- Basic-rate (20%) taxpayers: £1,000 of interest tax-free
- Higher-rate (40%) taxpayers: £500 tax-free
- Additional-rate (45%) taxpayers: £0
So a basic-rate taxpayer pays no tax until their savings interest tops £1,000 in a year. Only the interest above the allowance is taxed, and it’s taxed at your normal income tax rate.
When would you actually owe tax?
The quick way to picture it is to work backwards from the allowance. At a savings rate of around 5%, you’d need roughly £20,000 in the bank before the interest reaches £1,000 — the point a basic-rate taxpayer starts to owe anything. A higher-rate taxpayer, with a £500 allowance, hits their limit at around £10,000 of savings.
That’s why this used to be irrelevant and now isn’t: when rates were near zero you’d have needed a fortune to breach the allowance; today a fairly ordinary pot can do it. If your savings are climbing towards those figures, it’s worth paying attention.
The extra allowance for lower earners
There’s a lesser-known bonus for people with modest non-savings income (wages, pension): the starting rate for savings. On top of the PSA, you may be able to earn up to £5,000 of savings interest tax-free.
The catch is that this £5,000 shrinks by £1 for every £1 of non-savings income above your Personal Allowance (£12,570). Once your non-savings income reaches £17,570, the starting rate is gone. So it mainly helps people who live largely off savings, or have a low wage or pension alongside significant savings — but for them it’s very valuable.
How HMRC actually collects the tax
You don’t hand over anything at the bank — interest is paid to you without tax taken off. Instead:
- Banks and building societies report the interest you earned to HMRC after the end of the tax year.
- If you’re employed or a pensioner and owe tax on interest, HMRC usually just changes your tax code to collect it automatically over the following year.
- If you complete a Self Assessment return, you report the interest there and it’s settled that way.
Because it’s collected after the fact, a jump in savings income can show up as a tax-code change a year later — not a mistake, just the system catching up.
The simple way to stay tax-free
If your interest is heading past your allowance, the fix is a cash ISA. Interest earned inside an ISA is always tax-free, however much it is, and it doesn’t count towards your PSA. So the natural approach is: keep enough in a normal savings account to use up your tax-free allowance (where the rate might be a touch higher), and put the rest in a cash ISA to shelter it.
One honest note, though: if you’re comfortably under your allowance, a normal savings account paying a slightly better rate can beat the equivalent ISA — the tax shelter only has value once you’d otherwise be taxed. Not sure which band you’re in? Check your take-home first; it tells you whether your allowance is £1,000 or £500.
Check your tax band with the salary calculator →
Last checked 30 July 2026 for the 2026/27 tax year. Allowances are unchanged from 2025/26; savings rates move constantly, so treat the worked examples as illustrations.
Sources
Just so you know: this guide is information and journalism, not financial advice, and we don't recommend specific financial products. Your circumstances are your own — if you need personal advice, speak to a suitably qualified adviser. Information was correct at the "last updated" date above but things change; always check the linked primary sources.