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Savings FAQ

Do I pay tax on savings interest?

Sometimes yes, sometimes no. The answer depends on your wider income, the Personal Savings Allowance and the starting rate for savings.

By · Reviewed

The Personal Savings Allowance

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

Interest within the PSA is taxed at 0%, but it still counts as income. It is added to your other income when HMRC works out which tax band you are in (and so which PSA you get), and it counts towards adjusted net income for things like the High Income Child Benefit Charge and the Personal Allowance taper. Interest above the PSA is taxed at your marginal rate (20%, 40% or 45%).

The starting rate for savings

If your other taxable income (wages, pensions, rental profits, but not savings interest or dividends) is less than £17,570, you also get the starting rate for savings: up to £5,000 of interest taxed at 0%. Every £1 of other income above the £12,570 Personal Allowance reduces the £5,000 by £1. It mostly helps people with low earnings, for example in early retirement or a gap between jobs; the government has said the £5,000 limit stays until 2030/31.

The combined effect: someone whose other income is exactly £12,570 can receive up to £6,000 of interest tax-free (£5,000 starting rate plus the £1,000 PSA), and someone with no other income can receive up to £18,570, because any unused Personal Allowance covers interest too.

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; from 6 April 2027, savers aged 64 or under at the end of the tax year will be able to put no more than £12,000 of it into cash ISAs. For savers with substantial cash who are likely to exceed the PSA, using the ISA allowance before holding cash in a taxable account is the usual tax-efficient order.

Premium Bond prizes are also free of Income Tax and outside the PSA. The prize fund rate (4.35%, variable, when NS&I was checked on 3 October 2026) is an average across all bonds: most holders receive less than it in a given year, and some receive nothing.

How HMRC actually collects the tax

Banks and building societies have paid interest without deducting tax since April 2016. After 5 April each year they tell HMRC how much interest they paid you. If you already send a Self Assessment return, you report the interest there. If you are employed or get a pension and owe tax on interest of £10,000 or less, HMRC sends a tax calculation (usually between June and the following March) and normally collects the tax through your tax code; your code can also include an estimate of the current year’s interest. If you do not have a tax code, HMRC may send a Simple Assessment letter instead.

If your savings interest is more than £10,000, you need to report it on a Self Assessment tax return.

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 complete UK ISA guide for how the annual allowance works.

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.

These are the 2026/27 rules. From 6 April 2027 the tax rates on savings interest above your allowances rise by 2 percentage points, to 22%, 42% and 47% (Finance Act 2026, section 5).

Why the answer is often confusing

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% (an illustrative rate), earning £2,400 of interest in 2026/27. Her total income of £42,400 keeps her in the basic-rate band, so her Personal Savings Allowance is £1,000. The first £1,000 of interest is taxed at 0%; the remaining £1,400 is taxed at 20%, giving a tax bill of £280 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 £2,400 of interest, £500 is tax-free and £1,900 is taxed at 40% — a bill of £760. 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 £2,400 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 split equally between the account holders, and each person sets their own half against their own PSA and starting rate; you can contact HMRC if you think it should be split differently. 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, tax owed above your allowances is usually collected through a later tax code adjustment rather than straight away. GOV.UK’s example: tax on interest earned in 2025/26 is usually worked out during 2026/27 and collected through your code in 2027/28. That lag is why a tax-code change can appear a year or more after the interest was earned. If you have tax to pay on savings interest and have not heard from HMRC by 31 March after the end of the tax year, GOV.UK says you must contact HMRC.

Sources checked

Checked on 3 October 2026.

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