Many people are surprised to learn that the interest earned on their savings can be taxable. With savings rates remaining attractive and more people earning higher levels of interest, understanding the tax rules is becoming increasingly important.
The good news is that most UK savers can earn a certain amount of interest tax-free thanks to various allowances provided by HMRC.
In this guide, we’ll explain how savings interest is taxed, how much you can earn before paying tax, and ways to make your savings more tax-efficient.
What Is Savings Interest?
Savings interest is the money you earn from keeping funds in accounts such as:
- Savings accounts
- Fixed-rate bonds
- Regular saver accounts
- Building society accounts
- Credit union accounts
Most banks and building societies now pay interest gross (without deducting tax), meaning HMRC will determine whether any tax is due based on your overall income.
Do You Have to Pay Tax on Savings Interest?
Not everyone pays tax on savings interest.
Whether you pay tax depends on:
- Your total taxable income
- Your Income Tax band
- The amount of savings interest you receive
- Whether your savings are held in tax-efficient accounts such as ISAs
Many savers pay no tax at all because of the Personal Allowance, Starting Rate for Savings, and Personal Savings Allowance.
The Personal Savings Allowance (PSA)
The Personal Savings Allowance allows most taxpayers to earn some savings interest tax-free each tax year.
| Income Tax Band | Personal Savings Allowance |
| Basic Rate Taxpayer (20%) | £1,000 |
| Higher Rate Taxpayer (40%) | £500 |
| Additional Rate Taxpayer (45%) | £0 |
Example
Sarah earns £35,000 from employment and receives £800 in savings interest during the tax year.
As a basic-rate taxpayer, she has a Personal Savings Allowance of £1,000.
Because her savings interest is below £1,000, she will not pay any tax on that interest.
What Is the Starting Rate for Savings?
Some people with lower incomes may qualify for an additional tax-free allowance known as the Starting Rate for Savings.
This can provide up to £5,000 of tax-free savings interest.
However, the allowance reduces 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 for Savings is no longer available.
This allowance can be particularly useful for:
- Retirees
- Students
- Part-time workers
- Individuals with modest employment income
How the Allowances Work Together
In some cases, you may benefit from all three tax-free allowances:
- Personal Allowance (£12,570)
- Starting Rate for Savings (up to £5,000)
- Personal Savings Allowance (up to £1,000)
This means some individuals can earn a significant amount of savings interest without paying tax.
Example of Tax on Savings Interest
John earns £40,000 from employment and receives £1,200 in savings interest during the tax year.
His Personal Savings Allowance is £1,000.
Calculation:
- Savings interest received: £1,200
- Less Personal Savings Allowance: £1,000
- Taxable interest: £200
As a basic-rate taxpayer, he pays tax at 20%.
Tax due: £200 × 20% = £40
What About Joint Savings Accounts?
Many married couples and civil partners hold savings jointly.
In most cases, HMRC treats interest from a joint account as being split equally between both account holders for tax purposes.
This can be beneficial where one spouse pays tax at a lower rate or has unused allowances available.
Are ISAs Tax-Free?
Yes.
Interest earned within an Individual Savings Account (ISA) is generally free from Income Tax and does not count towards your Personal Savings Allowance.
Common ISA options include:
- Cash ISAs
- Stocks and Shares ISAs
- Lifetime ISAs
- Innovative Finance ISAs
For many savers, ISAs remain one of the most tax-efficient ways to grow savings.
How Does HMRC Collect Tax on Savings Interest?
Banks and building societies report savings interest information directly to HMRC.
If tax is due, HMRC may:
- Adjust your PAYE tax code
- Issue a Simple Assessment
- Require you to report the income through Self Assessment
It is important to check any tax code changes issued by HMRC to ensure they are accurate.
Ways to Reduce Tax on Savings Interest
1. Make Use of Your ISA Allowance
Holding savings within an ISA can protect future interest from tax.
2. Review Joint Savings Arrangements
Where appropriate, couples may benefit from holding savings in the name of the lower-rate taxpayer.
3. Monitor Your Interest Income
Higher savings balances can generate more interest than expected, potentially exceeding available allowances.
4. Spread Savings Across Tax-Efficient Accounts
Using available allowances effectively can help minimise your tax liability.
Common Mistakes to Avoid
- Assuming all savings interest is tax-free
- Forgetting that higher-rate taxpayers only receive a £500 allowance
- Ignoring interest earned across multiple accounts
- Failing to check HMRC tax code adjustments
- Overlooking the tax benefits of ISAs
- Not considering how joint savings accounts are taxed
Final Thoughts
Most UK savers will not pay tax on all of their savings interest thanks to the various allowances available. However, as savings balances grow and interest earnings increase, more individuals are finding themselves exceeding their tax-free limits.
Understanding the Personal Savings Allowance, Starting Rate for Savings, and ISA rules can help you keep more of your money and avoid unexpected tax bills.
If you are unsure whether your savings interest is taxable or want help planning your finances more efficiently, professional advice can help ensure you remain compliant while making the most of available tax reliefs.
Need Help With Your Tax Position?
At Pro Taxman, we help individuals and business owners understand their tax obligations, maximise available allowances, and stay compliant with HMRC requirements. Whether you need assistance with Self Assessment, tax planning, or general accounting support, our experienced team is here to help.