Do I pay tax on savings interest?

The Personal Savings Allowance

Most savers pay no tax on interest because of the Personal Savings Allowance (PSA). For 2026/27 the PSA is:

• £1,000 for basic-rate taxpayers (income up to £50,270)
• £500 for higher-rate taxpayers (income £50,271 to £125,140)
• £0 for additional-rate taxpayers (income above £125,140)

Below the PSA, savings interest is genuinely tax-free — it does not count as taxable income for any other purpose either. Above the PSA, interest is added to your other taxable income and taxed at your marginal rate (20%, 40%, or 45%).

The starting rate for savings

If your non-savings income is below the Personal Allowance plus £5,000, you can earn up to £5,000 of interest at a 0% "starting rate" before the PSA kicks in. This is rarely used because it requires very low non-savings income, but it can apply in retirement (where pension drawdown and dividends are sometimes the bulk of income), or in bridging years between jobs.

The combined effect: a basic-rate taxpayer with low non-savings income can shelter up to £6,000 of interest a year tax-free (£5,000 starting rate + £1,000 PSA), then pay 20% above that. This is one of the more useful but least-known reliefs in the UK tax code.

ISAs sit outside the PSA entirely

Interest earned inside a Cash ISA does not count toward the PSA at all — it is a separate tax-exempt wrapper. The 2026/27 ISA allowance is £20,000 across all ISA types combined. For savers with substantial cash who are likely to exceed the PSA, filling the ISA each year before holding cash in a regular savings account is the standard tax-efficient sequence.

Premium Bond winnings are also tax-free and outside the PSA, though their effective return is lower than the best-buy easy-access savings rates in most years.

How HMRC actually collects the tax

Banks no longer deduct tax at source on interest paid in the UK — interest is paid gross. HMRC collects the tax through your tax code (PAYE), or via Self Assessment if you are already filing. If you are an employee with no other reason to file a return, HMRC reconciles using the bank's annual interest reporting and adjusts your tax code in subsequent years. If you are over the PSA but under £10,000 of interest in the year, you usually do not need to file Self Assessment — HMRC handles it via tax code adjustment.

Above £10,000 of interest, Self Assessment is required.

Related on this site

Run the savings interest tax calculator to see the actual tax owed on a given balance and rate, the ISA vs GIA calculator to compare the long-run impact of wrapping savings inside an ISA, and the ISA allowance tip for the use-it-or-lose-it angle.

The short answer

Many people can earn some savings interest tax-free outside an ISA because of the Personal Savings Allowance. Basic-rate taxpayers usually get a £1,000 allowance, higher-rate taxpayers usually get £500, and additional-rate taxpayers normally get none.

Why the answer is often confusing

• The starting rate for savings can also help people with low non-savings income.
• ISA interest is already sheltered, so it does not use the Personal Savings Allowance in the same way.
• Your employment or pension income changes how much savings interest becomes taxable.

Best next page

Use Savings Interest Tax Calculator for the actual estimate and ISA vs GIA Calculator if you are deciding where future cash should sit.

Official source: GOV.UK tax-free interest on savings.

Worked example: a saver who breaches the PSA

Suppose Priya is a basic-rate taxpayer with a salary of £40,000. She has £60,000 in an easy-access account paying 4.5%, earning £2,700 of interest in 2026/27. Her Personal Savings Allowance is £1,000. The first £1,000 of interest is taxed at 0%; the remaining £1,700 is added to her income and taxed at her marginal rate of 20%, giving a tax bill of £340 on the interest.

Now suppose Priya gets a pay rise to £55,000, making her a higher-rate taxpayer. Two things change at once. Her PSA halves to £500, and the interest above that allowance is now taxed at 40%. On the same £2,700 of interest, £500 is tax-free and £2,200 is taxed at 40% — a bill of £880. The interest did not change, but the tax on it more than doubled because crossing £50,270 cut the allowance and lifted the rate together. This is why savers near the higher-rate threshold often move cash into an ISA: the same £2,700 inside a Cash ISA would be taxed at £0 regardless of her salary.

A subtle trap: large interest can itself push you into the higher-rate band. Savings interest counts as taxable income, so a basic-rate earner sitting just below £50,270 who receives a big lump of interest can find part of that interest taxed at 40% and the PSA reduced to £500 — even though their salary alone never crossed the line.

Joint accounts and which products count

Interest from a joint account is normally split 50/50 between the account holders, and each person sets their own half against their own PSA and starting rate. For a couple where one is a non-taxpayer or basic-rate payer and the other is higher-rate, it can be worth holding taxable savings in the lower earner’s sole name so more of the interest falls within a larger allowance and a lower rate.

Not everything labelled “savings” is taxed the same way. The following all count as taxable savings income and use the PSA: bank and building society interest, interest distributions from funds, most corporate and government bond interest, interest on peer-to-peer loans, and credit-union dividends. The following are outside the PSA because they are already tax-free: interest inside a Cash ISA or stocks-and-shares ISA, Premium Bond prizes, and the interest on NS&I products specifically badged as tax-free (such as certain savings certificates). Ordinary taxable NS&I products — like Income Bonds or Direct Saver — are paid gross and do count towards your PSA.

Because banks report interest to HMRC after the tax year ends, any tax owed above your allowances is usually collected through a later tax code adjustment rather than straight away. That lag is why a tax-code change can appear a year or more after the interest was actually earned — it is HMRC catching up, not double-counting.