// Source citations for the factual claims in this guide (kept out of the // rendered tree: flow-level MDX comments break Next scroll-on-navigation). export const sources = [ "source: https://www.gov.uk/apply-tax-free-interest-on-savings retrieved 2026-06-12 (PSA £1,000 / £500 / £0; starting rate for savings up to £5,000, reduced £1 per £1 of other income above the personal allowance, unavailable at £17,570+; HMRC collects via tax code for employees and pensioners; Self Assessment registration required if savings and investment income is over £10,000)", "source: site/lib/tax/config.ts (2026/27, verified in-repo against gov.uk 2026-06-10): personal allowance £12,570; basic rate 20% on taxable income to £37,700 (£50,270 gross); higher rate 40%; additional rate 45% from £125,140", "source: https://www.gov.uk/individual-savings-accounts retrieved 2026-06-12 (ISA allowance £20,000 for 2026/27)", ];

Guide · 4 minute read

Do I pay tax on savings interest?

Only above your personal savings allowance: £1,000 of interest a year tax-free for basic-rate taxpayers, £500 for higher-rate, nothing for additional-rate. Interest beyond that is taxed at your usual income tax rate, and HMRC usually collects it through your tax code.

The personal savings allowance by band

The allowance depends on which income tax band you are in for the 2026/27 tax year:

• Basic rate (income up to £50,270): £1,000 of interest tax-free.
• Higher rate (income above £50,270): £500 of interest tax-free.
• Additional rate (income above £125,140): no allowance at all.

Interest above your allowance is taxed at your marginal rate: 20%, 40% or 45%. At a 4.5% savings rate, a basic-rate taxpayer can hold roughly £22,000 in ordinary savings before any tax is due; a higher-rate taxpayer only about £11,000. If a pay rise nudges you over £50,270, your allowance halves in the same year, which is how frozen tax thresholds quietly drag more savers into paying tax on interest. Not sure which band you are in? Your taxable income includes the interest itself, and our take-home pay calculator shows where your salary sits against the thresholds.

The starting rate for savings (the low-earner bonus)

If your other income (wages, pension) is low, there is a second, bigger allowance most people have never heard of. The starting rate for savings lets you earn up to £5,000 of interest at 0%, on top of the personal savings allowance.

The catch: every £1 of other income above the £12,570 personal allowance reduces it by £1, and it disappears entirely once other income reaches £17,570. Someone with a £14,000 pension, for example, is £1,430 over the personal allowance, so they keep £3,570 of the starting rate plus the £1,000 personal savings allowance: £4,570 of interest before tax. This mainly matters for retirees living off savings and people working part-time.

How HMRC actually collects it

You do not need to declare interest from ordinary accounts yourself in most cases. Banks and building societies report what they paid you directly to HMRC. If you are employed or get a pension, HMRC then adjusts your tax code so the tax comes out of your pay automatically, estimating this year's interest from what you earned last year. If the estimate is off, you get a tax calculation letter (a P800) after the year ends, between June and the following March.

You only need Self Assessment for savings if you already file one (for example, because you are self-employed) or if your savings and investment income is over £10,000 a year.

When an ISA beats a higher headline rate

Cash ISA interest is always tax-free and never touches your allowance, but ISA rates are often slightly below the best ordinary accounts. The comparison that matters is the after-tax rate, not the headline.

Once you are paying tax on the marginal pound of interest, a basic-rate taxpayer keeps 80% of it, so a 4.5% taxable account is really worth 3.6% on that slice; a higher-rate taxpayer keeps 60%, so the same account is worth 2.7%. The crossover rule of thumb: an ISA wins whenever its rate is above your taxable rate times 0.8 (basic rate) or times 0.6 (higher rate), applied to money above your allowance.

Concretely, £25,000 at 4.5% earns £1,125. A basic-rate taxpayer pays 20% on the £125 above the allowance, £25 of tax, leaving an effective 4.4%. So a cash ISA paying 4.4% already matches, and anything above that wins outright. For a higher-rate taxpayer with the same pot the ISA wins even at much lower rates. You can put up to £20,000 into ISAs in 2026/27; run your own numbers with the ISA calculator.

There is also a compounding angle: tax skimmed off each year is money that never compounds. Over a decade the gap between a taxed account and an ISA widens beyond the simple annual difference, which the compound interest calculator makes visible.

The honest trade-offs

If all your interest fits inside your allowance, the best ordinary easy-access rate usually wins, and an ISA spends allowance you might want for investments. But allowances are per year and rates change; if your balance is growing, or a promotion will halve your allowance, moving money into an ISA early protects future interest you cannot shelter retrospectively. Fixed-rate ISAs also lock today's tax-free rate, while a fixed ordinary bond can dump all its interest into a single tax year and blow through the allowance at maturity.

Common questions

How much interest can I earn before paying tax in the UK?

In 2026/27, £1,000 a year tax-free if you are a basic-rate taxpayer, £500 if higher-rate, £0 if additional-rate. Low earners with other income under £17,570 may also get up to £5,000 of interest at 0% through the starting rate for savings.

Do I need to tell HMRC about my savings interest?

Usually not. Banks report interest to HMRC automatically, and HMRC adjusts your tax code or sends a tax calculation letter. You only need Self Assessment if you already file one or your savings and investment income is over £10,000 a year.

Is a cash ISA worth it if my interest is under the allowance?

Often not immediately; the best taxable easy-access rate usually beats the best ISA rate. But if your balance is growing or you expect to become a higher-rate taxpayer, sheltering money early protects interest you cannot shelter retrospectively.

What rate of tax do I pay on savings interest over the allowance?

Your marginal income tax rate: 20% for basic-rate taxpayers, 40% for higher-rate and 45% for additional-rate. The interest itself counts as income, so a large interest payment can push you into a higher band.

What is the starting rate for savings?

A 0% band of up to £5,000 of interest for people with low other income. Every £1 of non-savings income above the £12,570 personal allowance removes £1 of it, and it is gone entirely once other income reaches £17,570.

Guidance and education, not regulated financial advice.