How savings interest is taxed

The allowances, in order

Your savings interest is added on top of your other income: salary, pension, self-employed or rental profit. Four things can make some or all of it tax-free, used in this order:

• Any Personal Allowance left over. If your other income is below £12,570, what’s left of the allowance covers interest first.
• The starting rate for savings. Up to £5,000 of interest at 0%, but every £1 of other income above £12,570 takes £1 off it. It’s gone once your other income reaches £17,570.
• The Personal Savings Allowance. £1,000 of interest at 0% if your income is in the basic rate band, £500 in the higher rate band, and nothing for an additional rate taxpayer. Which one you get depends on your whole income, interest included.
• ISAs. Interest in a cash ISA is always tax-free and doesn’t count at all. You can pay in up to £20,000 a year, all of it in cash.

The allowances are 0% rates, not deductions, so they still use up room in your band. Savings interest is taxed at the same UK rates in Scotland: Scotland’s own rates are only for earned income.

Worked examples

Tax on a year’s interest in 2026/27, and from April 2027 at the announced rates:

£35,000 salary, £1,800 of interest (£40,000 at 4.5%): £1,000 is tax-free and £800 is taxed at 20%, so £160.

£60,000 salary, the same £1,800: as a higher rate taxpayer you get £500 tax-free, and the other £1,300 is taxed at 40%: £520. From April 2027, at 44%, £572.

£15,000 pension, £4,000 of interest: the pension is £2,430 over the Personal Allowance, which leaves £2,570 of the starting rate. Add the £1,000 allowance and £3,570 is tax-free; the last £430 is taxed at 20%, so £86.

No other income: the £12,570 Personal Allowance, the £5,000 starting rate and the £1,000 allowance mean £18,570 of interest is tax-free.

Work out the tax on your own savings →

What changes in April 2027

From 6 April 2027 the rates on savings interest are due to go up by 4 points, to 24%, 44% and 49%, across the whole UK. The 2025 Budget announced the first 2 points, and the 28 October 2026 Budget added 2 more. The allowances don’t change, and it isn’t law yet. The same Budget dropped the plan to cut the cash ISA limit to £12,000, so you can still shelter £20,000 a year.

For a higher rate taxpayer, a 4.5% account pays 2.7% after tax today and 2.52% from April 2027. That makes an ISA, paying off a mortgage or putting money into a pension relatively better than before.

How much you can save before paying tax

Divide your tax-free interest by the interest rate. At 4.5%, a basic rate taxpayer with a £1,000 allowance can hold about £22,200 outside an ISA before paying tax, and a higher rate taxpayer with £500 about £11,100. The Budget puts it as over £25,000 for a basic rate taxpayer, at slightly lower rates. With a low income and the starting rate, it can be well over £100,000.

How the tax is paid

Banks and building societies pay interest without taking tax off, and tell HMRC how much they’ve paid you after each tax year ends. If you’re employed or get a pension, HMRC usually collects any tax by changing your tax code. If it can’t, it sends you a bill called a Simple Assessment. If you already fill in a Self Assessment return, put the interest on it. If you have more than £10,000 of interest in a year, HMRC will send you a notice to fill in a return.

Things that catch people out

Fixed-rate bonds. A bond that pays all its interest when it ends counts in that one tax year, which can push you over your allowance, or into a higher band, in that year.

Crossing into the higher rate. Interest counts towards your income for deciding your allowance. If it lifts you over £50,270, your allowance drops from £1,000 to £500.

Over £100,000. Interest counts towards the £100,000 limit, above which you lose £1 of Personal Allowance for every £2. That costs tax on your other income as well.

Joint accounts. The interest is split between you, usually half each, and each of you uses your own allowances.