Tax on Savings Interest
The Personal Savings Allowance, the starting rate for savings, and how interest can shrink its own allowance
If you have savings outside an ISA, the interest they pay is taxable income, on top of your salary. This includes interest from regular savings accounts, fixed-rate bonds, and ordinary bank and building society accounts. Premium bonds' prize interest is not included, as this is also tax-free. For most people, most or all of it never actually gets taxed, because of two allowances covered below. This page explains how those work, how interest stacks on top of your other income, and how HMRC actually collects anything you do owe if you're on PAYE.
The two allowances
Two separate 0% allowances can apply to savings interest, and, unlike most of this site's other allowances, they can both apply to the same person at once.
| Allowance | Amount | Who it applies to |
|---|---|---|
| Personal Savings Allowance | £1,000 (basic rate) / £500 (higher rate) / £0 (additional rate) | Everyone, sized by your Income Tax band |
| Starting rate for savings | Up to £5,000 | Only if your non-savings income is low, see below |
The Personal Savings Allowance is the one that matters to most people: £1,000 of interest tax-free if you're a basic-rate taxpayer, £500 if you're higher-rate, and nothing extra if you're additional-rate. Crucially, which figure applies is based on your total income including the interest itself, not your salary alone. More on why that matters below.
The starting rate for savings is a separate, additional band worth up to £5,000, but only relevant if your income from wages, pensions, and similar sources (not the interest itself) is low. It's full if that income is at or below your Personal Allowance, shrinks £1 for every £1 above that, and disappears entirely once that income reaches £17,570.
Above both allowances, interest is currently taxed at the same rates as your other income, 20%, 40%, or 45%, not a separate savings-specific rate. That's different from dividends, which already have their own rate table; see Dividend Tax Explained.
Worked example: £30,000 salary, £600 of savings interest
Someone earning £30,000 in wages with £600 of savings interest: their income is well above the level where the starting rate for savings applies, but as a basic-rate taxpayer they still get a £1,000 Personal Savings Allowance, comfortably more than the interest itself. Tax due on the interest: £0.
How interest stacks on top of your other income
Savings interest isn't taxed on its own. Like dividends and capital gains, it's added on top of your salary and other income to work out which band it falls into, and which allowances apply. Your salary fills the Personal Allowance and basic-rate band first; interest then stacks above that, tax-free where either allowance covers it, taxed at the applicable rate for the rest.
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The allowance's hidden catch
Here's the part that catches people out: because the Personal Savings Allowance is sized by your total income, a large enough amount of interest can shrink its own allowance. Someone whose salary alone is comfortably basic-rate can still only get the smaller, higher-rate allowance once their salary and interest together cross the threshold, leaving more of the interest itself exposed to tax than they might expect.
Worked example: interest shrinking its own allowance
A salary of £49,800 is basic-rate on its own. Add £1,200 of savings interest and total income reaches £51,000, over the higher-rate threshold. That shrinks the Personal Savings Allowance to just £500, not the £1,000 a basic-rate taxpayer would otherwise get.
The first £470 of interest fills the remaining basic-rate headroom, tax-free, absorbed by the allowance. The rest sits in the higher-rate band, where the last £30 of allowance covers a little more before the remaining £700 is taxed at 40%: £280 in total.
Just short of that threshold, the story is completely different: the same salary with £470 of interest instead keeps total income at exactly £50,270, still basic rate, so the full £1,000 allowance applies, and the tax due is £0.
What's changing from 2027
This hasn't happened yet, but it's confirmed, enacted policy, not a proposal: from 6 April 2027, savings interest gets its own separate rate table for the first time. 22%, 42%, and 47%, two percentage points above the equivalent ordinary Income Tax rate in each case. The Personal Savings Allowance and starting rate for savings above aren't affected, only the rate charged once both are used up.
How HMRC actually collects it
Banks and building societies report the interest they've paid you directly to HMRC after the tax year ends. You don't need to declare it yourself in most cases, and there's no separate form to fill in. If tax turns out to be due, HMRC typically collects it by adjusting your tax code the following year, the same coding-out approach covered in Understanding Your Tax Code, rather than through Self Assessment.
This page explains general rules for tax on savings interest and is not personalised advice; see the disclaimer. It doesn't cover ISAs (which are entirely exempt, regardless of amount), Premium Bond prizes (which are tax-free by design, not through either allowance above), or savings held by a business. See also Dividend Tax Explained and Capital Gains Tax Explained for how the same "stacking on top of your other income" idea applies to other investment income.