For many years, savers in the United Kingdom didn’t have to worry about tax on savings interest because interest rates remained historically low. However, there has been a shift in the economic landscape, and many people are finding themselves liable for tax on savings interest.
Whether you have a fixed-rate bond, a high-yield easy-access account, or a standard savings account, understanding how much you can earn before paying tax is vital for protecting your money.
This blog explains the tax rules on savings interest, the Personal Savings Allowance, current UK thresholds, and how to keep your interest tax-free.
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What are the Tax on Savings Interest Rules in the UK
Savings accounts are not usually viewed as an investment. But they earn interest which HM Revenue and Customs (HMRC) taxes, whether you keep, transfer, or withdraw it.
How you are taxed on the interest from savings depends on your total income and your tax band.
If your total interest exceeds your tax-free allowances, it may be subject to Income Tax. The main tax-free savings allowances are:
- Personal Allowance
- Starter Rate for Savings
- Personal Savings Allowance
Your tax band also determines how much tax on savings interest you must pay. If you earn more interest than the threshold amount, you pay tax on the extra amount at your usual Income Tax rate. Then you may have to file a Self Assessment tax return to HMRC.
Personal Savings Allowance (PSA)
Most people do not pay tax on savings interest due to the Personal Savings Allowance (PSA). This allowance lets you earn a set amount of interest each tax year without paying any Income Tax.
You may earn up to £1,000 or £500 of interest without paying tax on it, depending on which Income Tax Band you are in. The table below shows how much your savings allowance is based on your income tax band.
| Income Tax Band | Annual Income | Savings Allowance |
| Basic Rate (20%) | £12,571 to £50,270 | £1,000 |
| Higher Rate (40%) | £50,271 to £125,140 | £500 |
| Additional Rate (45%) | Over £125,140 | £0 |
Note: If you are an additional rate taxpayer, you have zero allowance, and you must pay tax on savings interest earned.
Moreover, you can claim a larger Personal Allowance if you are eligible for Blind Person’s Allowance or Marriage Allowance.
Tax on Savings Interest Scotland
If you live in Scotland, the income tax bands are different. The table below shows the Scottish Income Tax rates you pay in each band if you have a standard Personal Allowance of £12,570.
| Tax Band | Taxable Income | Scottish Tax Rate |
| Personal Allowance | Up to £12,570 | 0% |
| Starter rate | £12,571 to £15,397 | 19% |
| Basic rate | £15,398 to £27,491 | 20% |
| Intermediate rate | £27,492 to £43,662 | 21% |
| Higher rate | £43,663 to £75,000 | 42% |
| Advanced rate | £75,001 to £125,140 | 45% |
| Top rate | Over £125,140 | 48% |
Remember, if you earn more than £125,140, you do not get a Personal Allowance.
The Starting Rate for Savings
Starting Rate for Savings is an extra tax-free allowance of up to £5,000 for savings interest. This allowance is available to people with a lower income (generally under £17,570) from other sources like job, dividends, or a pension.
If your taxable income is £12,570 or less, you may be eligible for the Starting Rate for Savings. However, if your other income exceeds £12,570, this £5,000 allowance is reduced by £1 for every £1. This allowance disappears once your non-savings income reaches £17,570.
What Savings Interests Are Taxed in the UK?
The types of savings interest that are usually taxable are:
- Unit and investment trusts
- Bank and building society accounts
- Bonds (government or company) and gilts
- Open-ended investment companies (OEICs)
- Some life insurance contracts
- Life annuity payments
Note: Savings in tax-free accounts like National Savings and Investments (NS&I) and Individual Savings Accounts (ISAs) do not count towards the allowance.
How Does HMRC Collect Tax on Savings Interest?
Building societies and banks in the UK no longer deduct tax at source. Instead, they pay the gross interest. It is your responsibility to ensure HMRC receives what is owed. Tax collection depends on the amount earned and your employment status.
For Pensioners or Employees
If you receive a pension or are employed, HMRC usually collects the tax by changing your tax code. It receives data from your bank automatically at the end of the tax year and collects tax on savings interest automatically through the Pay As You Earn (PAYE) system.
For Self-Employed
If you are self-employed or your total income from investments or savings is over £10,000 in a single tax year, you must report your interest to HMRC. You must report it through Self Assessement tax return, and the tax will be calculated as part of your tax bill.
Keep in mind that interest from accounts held outside the UK is not reported automatically and must be declared.
Do I Have to Notify HMRC of Savings Interest?
In most cases, no, you do not have to notify HMRC of your savings interest. Building societies and banks are legally required to report your interest directly to HMRC at the end of the tax year. Usually, HMRC already knows what you have earned and applies tax on savings interest by adjusting the tax code.
How to Avoid Paying Tax on Savings?
If you are close to exceeding your Personal Savings Allowance, there are numerous legal ways to protect your money and avoid paying tax on savings interest.
Joint Accounts
When it’s a joint account, the interest is split equally between the account holders. If you are a Higher Rate taxpayer, but your partner is a Basic Rate taxpayer, moving savings into their name can effectively increase your combined tax-free threshold.
Individual Savings Accounts (ISAs)
Any interest earned inside an Individual Savings Account is entirely tax-free. It does not count towards your Personal Savings Allowance. The annual ISA limit is £20,000 for the 2025/26 tax year.
Premium Bonds
Any winnings from Premium Bonds or National Savings & Investments are tax-free. Although this is not technically an interest, it is a popular alternative for those at the top of their tax brackets.
How to Pay Tax on Savings Interest?
Paying tax on savings interests depends on the type of income and whether you are already in the Self Assessment system. If you are a pensioner or employee and exceed your PSA, HMRC will adjust your tax code for the following year.
If your total savings and investment income exceeds £10,000, you must file a Self Assessment tax return.
Nevertheless, if you are not in the Self Assessment or PAYE system, HMRC will contact you if you owe tax on savings interest.
What Happens If You Overpaid Tax on Your Savings Interest?
If you believe you overpaid tax on savings interest, you can claim it by:
- Completing the Form R40. You can complete it online through the Government Gateway or by post.
- Applying for a refund through your Self Assessment. As soon as you submit your Self Assessment, any overpaid tax will be automatically calculated. It then appears as a credit balance on your account, which you can request to be repaid to your bank account.
Final Thought
Navigating the rules around tax on savings interest is a crucial part of modern financial planning. With rising interest rates, it is easier to exceed your tax-free savings limit (£1,000 or £500).
By tracking your interest, checking your tax code, and using your tax-free Individual Savings Accounts, you can keep more of your money and pay less to HMRC.
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Disclaimer: This article intends to provide general information on tax on savings interest in the UK.