Do you pay tax on savings interest?

Saving money is a great feeling, especially when you see your money grow with savings interest. But you might be wondering: do I have to pay tax on my savings interest in the UK?

The short answer is yes, savings interest is a form of taxable income under HMRC tax rules. But thanks to key allowances like the Personal Allowance and the Personal Savings Allowance, you might not have to pay a penny in tax on savings interest.

This guide will walk you through the key rules and allowances you need to know, so you can work out if you’ll be paying tax on your savings interest and, if so, how much. We’ll also cover some ways you can continue to save tax free to maximise your money.

How does tax on savings work?

Here’s a breakdown of how the system for tax on savings interest works and how HMRC determines if you need to pay tax on your savings interest:

1. Your savings interest is paid gross: this means that the tax hasn’t already been taken off by your bank. Any tax due on the interest is paid later.
2. Tax allowances apply: most people can earn a certain amount of tax-free savings interest each tax year (6th April–5th April, the following year) through tax free allowances like the Personal Allowance, starting rate for savings and Personal Savings Allowance.
3. Joint accounts are split equally: savings interest earned in a joint account is divided equally between the account holders for tax purposes.
4. Your total income is calculated: all of your taxable income is calculated. If you’re below any applicable tax allowances, you won’t pay anything. If you’re over the applicable allowances, you may need to pay tax on your savings.
5. Are you an employee or a pensioner? If you need to pay tax on your savings interest and you’re employed or receiving a pension, HMRC will change your tax code and you pay tax automatically through the pay-as-you-earn (PAYE) system.
6. Are you self-employed? If you’re self-employed, you will complete a self-assessed tax return, in which you’ll need to declare your savings interest.
7. Tax is charged at your Income Tax rate: if tax on savings interest is payable, you’ll be charged it at your usual rate of Income Tax.

What are tax-free savings allowances?

In the UK, tax-free savings allowances allow people to earn a certain amount of interest without paying tax. When it comes to your savings, you’ll need to pay tax when the interest you earn exceeds these allowances. It is then the excess amount that is taxed.

The main tax-free allowances that we’ll look at next are:

• Personal Allowance
• Starting rate for savings
• Personal Savings Allowance

We’ll look at other allowances, such as the ISA allowance, later in the guide.

What is the Personal Allowance?

In the UK, most people are entitled to a Personal Allowance when it comes to tax. This is the amount of income from all sources (like your salary or pension) you can earn every year without having to pay tax.

The Personal Allowance is £12,570 for the 2025/26 tax year. However, it is reduced by £1 for every £2 you earn over £100,000. This means that the most you can earn before your Personal Allowance is reduced to £0 is £125,140.

It’s worth noting that you may be able to claim a larger Personal Allowance if you are eligible for the Marriage Allowance or Blind Person’s Allowance.

Should you earn less than £12,570, including any savings interest, your total income is covered by your Personal Allowance and you generally won’t have to pay any income tax.

Note: your Personal Allowance is different to the Personal Savings Allowance, which only applies to your savings interest, not all of your income.

What is the starting rate for savings?

The starting rate for savings is a tax break that lets you earn savings interest without paying tax. It’s designed for people with lower incomes.

If your income from other sources than your savings (e.g. your wage or pension) is less than £17,570 a year, you might be eligible for the starting rate for savings. If you are, you can earn up to £5,000 of savings interest without paying any tax.

However, you may not qualify for the full amount if you earn over the Personal Allowance of £12,570. For every £1 you receive over the Personal Allowance, your starting rate for savings (£5,000) is reduced by £1.

For example, if you earn £17,000, your Personal Allowance covers the first £12,570. The rest of your taxable income is £4,430. This means your starting rate for savings is now reduced by the same amount, so you can earn up to £570 in tax free interest.

What is the Personal Savings Allowance?

The Personal Savings Allowance is another allowance that lets you earn up to £1,000 in savings interest tax free each year. The amount of your Personal Savings Allowance depends on the Income Tax band you fall into:

• Basic Rate Taxpayer (20%): up to £1,000 in savings interest tax-free.
• Higher Rate Taxpayer (40%): up to £500 in savings interest tax-free.
• Additional Rate Taxpayer (45%): no Personal Savings Allowance.

Not sure of your tax band? Check the Government’s official guidance on Income Tax rates to find out more.

Your Personal Savings Allowance covers interest from a range of sources, including:

• Bank and building society accounts
• Credit union accounts
• Peer-to-peer lending
• Unit and investment trusts
• Open-ended investment companies
• Government and company bonds
• Interest from life annuity payments
• Selected life insurance contracts

Already have savings in an ISA? Then the interest you earn from them doesn’t count towards your Personal Savings Allowance.

Note: your Personal Savings Allowance is separate to your Personal Allowance. It only applies to your savings interest and not your total income. If eligible, it is used in addition to the Personal Allowance when calculating your annual tax bill.

Are there any other tax-free allowances?

Your ISA allowance

An ISA, or Individual Savings Account, is a type of account that allows you to earn interest tax free, so you don’t pay any UK Income Tax on the interest you receive.

Each tax year, you can currently save or invest up to £20,000 across your ISAs — this is your ISA allowance.

There are a few types of ISA to suit the needs of savers and investors:

• Cash ISAs (like our Easy Access Cash ISA): generally saving money
• Stocks and Shares ISAs: tailored towards investing
• Lifetime ISAs: saving specifically for a house deposit or retirement (capped at £4,000 per tax year and still count towards your ISA allowance).

In addition, if you’re saving for your child’s future:

• Junior ISAs: have a separate annual limit of £9,000 per child that doesn’t count towards your ISA allowance.

ISAs can come in handy whether you’re a higher rate taxpayer with no Personal Savings Allowance or have a large savings interest income that will be taxed. This is because they can act as a tax shelter for your funds, so you can earn interest tax free.

Tax relief on private pension contributions

In the UK, you can get tax relief on your contributions to a private pension, including most workplace, personal, stakeholder and overseas pensions, up to a certain limit.

Your contributions will be tax-free up to the following limits (whichever is lower):

• 100% of your annual earnings
• An annual allowance of £60,000

Note: the £60,000 annual allowance may be reduced (tapered) to as little as £10,000 for individuals with an ‘adjusted income’ over £260,000 (see GOV.UK), or if you have already accessed your pension via the Money Purchase Annual Allowance rules (see GOV.UK).

There are also limits on the total tax-free lump sums you can take from your pensions. Any withdrawals in excess of the following will be taxed:

• Lump Sum Allowance: the total amount of tax-free lump sums you can take during your lifetime is limited to £268,275.
• Lump Sum and Death Benefit Allowance: the total tax-free amount that you or your beneficiaries can receive from your pension as a lump sum is £1,073,100.

Note: you will need to pay tax on contributions if your pension provider is not registered with HMRC for tax relief or does not follow HMRC’s rules and regulations.

How much can I save tax free?

The total amount you can save tax free combines your Personal Allowance, Personal Savings Allowance and any starting rate for savings you are due.

Remember: you can also save tax-free using any ISAs and pension allowances.

Below is a summary of the tax allowances for different levels of earnings. Using these you should be able to calculate how much you can save tax free. We’ve also included some examples to illustrate this calculation.

Earnings	Personal Allowance	Personal Savings Allowance	Starting rate for savings	ISA allowance	Pension Annual Allowance
£12,570 or under	£12,570	£1,000	£5,000	£20,000	100% of earnings
£12,571–£17,570	£12,570	£1,000	£5,000 minus £1 for every £1 over £12,570	£20,000	100% of earnings
£17,571–£50,270	£12,570	£1,000	£0	£20,000	£60,000
£50,271–£125,140	£12,570	£500	£0	£20,000	£60,000
£125,141–£150,000	£0 (fully reduced)	£0	£0	£20,000	£60,000
Over £150,000	£0	£0	£0	£20,000	£60,000

Example 1 Your salary is £10,000.

• Personal Allowance: £12,570
• Taxable income: £0 (£10,000 is fully covered by your Personal Allowance)
• Remaining Personal Allowance: £2,570 (£12,570 minus £10,000)
• Total tax-free interest: the remaining £2,570 Personal Allowance, plus your £1,000 Personal Savings Allowance, and the full £5,000 starting rate for savings means you can earn up to £8,570 interest tax free

You can also save up to £20,000 in an ISA and contribute up to 100% of your earnings to a pension tax free.

Example 2 Your salary is £55,000. You are a higher rate taxpayer.

• Personal Allowance: your full Allowance (£12,570) is used on your salary, leaving no allowance to cover interest
• Personal Savings Allowance: £500
• Total tax-free interest: you can earn up to £500 in interest tax-free

You can also save up to £20,000 in an ISA and add up to £60,000 to a pension tax free.

Example 3 Your salary is £200,000. You are an additional rate taxpayer.

• Personal allowance: reduced to zero due to your high income
• Personal Savings Allowance: £0
• Total tax-free interest: £0

Your options for earning tax-free savings interest are an ISA (up to £20,000) and pension contributions (up to £60,000, subject to the ‘tapered annual allowance’ rules).

How does HMRC collect tax on savings interest?

So, what happens if your interest on savings pushes you over your tax-free limits? You’ll need to pay tax at your normal Income Tax rate.

Note: if your savings interest pushes you into another tax band, you’ll pay tax at the higher rate for the portion of your income over the threshold.

How does HMRC know about your interest? By law, UK banks and building societies must send a report to HMRC at the end of every tax year (5th April) showing exactly how much interest you earned. HMRC then matches this data to your tax records.

How you actually pay this tax depends on your situation:

• If you’re employed or get a pension: HMRC usually collects tax automatically. They do this through your pay (the PAYE system) by adjusting your tax code. They work this out by estimating your income based on what you earned the previous tax year.
• If you’re self-employed: you just need to declare any savings interest you earned on your annual self-assessment tax return.
• If neither of those apply: HMRC will get in touch with you directly (often via a ‘Simple Assessment’ letter) to tell you how much you owe and how to pay.

One thing to note: if you earn over £10,000 in savings interest in a year, you must fill in a self-assessment tax return, even if you usually don’t. If you’re ever unsure about your situation, the best thing to do is contact HMRC or talk to a tax advisor.

Paying tax on savings when you’re retired

When you’re retired, your income often comes from sources like the State Pension and private or workplace pensions. This income is treated by HMRC as ‘non-savings income’.

As your non-savings income may be lower than when you were working, you could benefit more from the three tax-free savings allowances we mentioned earlier.

However, if your savings interest is above these allowances, HMRC usually collects the tax through the PAYE system. As you aren’t earning a wage, the tax is collected by adjusting the tax code used by your private pension provider and State Pension agency.

They will reduce the amount of tax-free allowance in your tax code to make sure the correct tax is deducted from your pension income to cover the tax due on your interest.

Making the most of your savings

If you find yourself paying tax on savings, it can be a smart move to start looking at tax-efficient options to ensure your money is working as efficiently as possible.

The most popular ways to keep your savings tax-free are pensions and ISAs:

• Pensions are best for long-term saving for retirement, offering generous tax relief on contributions.
• ISAs are ideal for shorter to medium-term goals. They currently let you save up to £20,000 each tax year without paying a penny of UK income tax on the interest or returns.

When it comes to your cash savings, a cash ISA is an option for reducing the need to pay tax on your savings. Here at Atom, our Easy Access Cash ISA allows you to save tax-free, helping you to maximise the growth of your money.

We hope this guide has provided you with a clearer understanding of whether you owe tax on savings interest and how to estimate the amount.

Remember: tax is based on your own circumstances and is subject to change. For specific advice on your situation, please speak to a tax advisor.