Many UK taxpayers assume interest from savings is always tax-free, especially after years of low returns. But with rising interest rates since 2023, many savers now exceed their tax-free allowances and face tax bills if they’re not careful. This creates uncertainty for clients, so accountants must be ready to explain how savings tax works particularly for those outside tax-free wrappers like ISAs.
Understanding tax on savings interest helps accountants guide clients accurately and avoid surprises at self-assessment time. In the 2025-26 tax year, a person’s tax on savings depends on their income tax band and how much interest they receive on non-ISA savings.
Note:Tax rules and allowances are subject to change in future budgets. Always verify current rates with HMRC or consult a tax professional before making financial decisions.
This guide covers:
- What tax on savings interest means
- Key allowances (personal savings allowance & starting rate)
- Rates that apply after allowances
- How to calculate tax on savings interest
- Practical examples and calculators
What Tax on Savings Interest Means?
Interest earned on savings accounts, bonds, or other cash holdings is treated as taxable income under UK income tax rules. It is not the cash itself that is taxed; it’s the interest you receive each tax year (6 April to 5 April).
For many taxpayers, part or all of this interest may not be taxed because of allowances such as:
- Personal savings allowance (PSA)
- Starting rate for savings
- Personal allowance
These allowances reduce the amount of interest that is subject to tax.
Key Allowances: Personal Savings Allowance & Starting Rate for Savings
Personal Savings Allowance (PSA)
The personal savings allowance lets taxpayers earn a set amount of interest before paying tax on it.
| Tax band | PSA (2025-26) |
|---|---|
| Basic rate (20%) | £1,000 |
| Higher rate (40%) | £500 |
| Additional rate (45%) | £0 |
This allowance is in addition to your personal allowance (typically £12,570) and applies to non-ISA interest only.
Interest from ISAs is currently tax-free under UK rules. and does not count towards PSA.
Starting Rate for Savings
The starting rate for savings can let you earn up to £5,000 of interest tax-free if your other income (e.g. wages or pensions) is low enough.
However, the £5,000 starting rate is reduced by £1 for every £1 of other income above your personal allowance. If your non-savings income is £17,570 or more, the starting rate does not apply.
How Much Tax You Pay After Allowances?
Once allowances are used, the remaining interest is taxed at your usual income tax rate (e.g. 20%, 40% or 45%).
Table: Savings Tax After Allowances (2025-26)
| Income Tax Band | Tax Rate on Savings Above Allowances |
|---|---|
| Basic rate | 20% |
| Higher rate | 40% |
| Additional rate | 45% |
For example:
- A basic rate taxpayer with £1,200 of savings interest and no other income above personal allowance would pay tax on £200 of interest at 20% (= £40) after using the £1,000 PSA.
- A higher rate taxpayer with £1,200 in savings interest would pay 40% on £700 after the £500 PSA, meaning £280 of tax.
How Personal Allowance Interacts With Savings Tax?
Your personal allowance applies to all taxable income including savings interest. If your total income (including savings interest) stays below the personal allowance (£12,570 for most people in 2025-26), you will not pay any income tax on savings interest.
If your non-savings income uses up all or part of your personal allowance, then allowances for savings reduce accordingly.
How to Calculate Tax on Savings Interest?
You can use the following steps to calculate tax on savings interest:
- Work out total savings interest earned in the tax year.
- Apply personal allowance against total income (including wages, pensions).
- If eligible, apply starting rate for savings (up to £5,000).
- Apply personal savings allowance (PSA).
- Tax any remaining interest at your income tax rate.
Chart: Steps to Calculate Tax on Savings
- Total income = wages + pensions + interest
- Deduct personal allowance
- Apply starting rate for savings if eligible
- Apply PSA
- Tax balance at standard income tax rates
Many accountants and taxpayers use personal savings allowance calculators available from banks and financial websites to do this quickly.
Examples:
Example 1: Basic rate taxpayer
- Non-savings income: £20,000
- Savings interest: £1,200 Savings tax calculation:
- PSA used: £1,000 tax-free
- Remaining interest: £200 taxed at 20% = £40
Example 2: Low Income with Starting Rate
- Non-savings income: £15,000
- Savings interest: £4,000 Here, interest may be covered by a combination of:
- Personal allowance £12,570
- Starting rate for savings up to £5,000
- PSA may cover extra, depending on income
In this case, total interest could be fully tax-free.
How HMRC Collects Tax on Savings Interest?
HMRC collects tax on savings interest through two main methods:
PAYE Tax Code Adjustments: Banks and building societies report interest to HMRC, which adjusts your tax code to collect tax automatically through your salary or pension.
Self Assessment: If you complete a tax return (e.g., self-employed, high earners), you must declare savings interest and pay any tax due directly.
Most employed taxpayers have tax collected via PAYE, while Self-Assessment filers must report all interest manually.
Using Calculators for Tax on Savings
Accountants can recommend clients use an allowance calculator to estimate potential tax on savings. Many service providers offer simple calculators, often asking for:
These tools apply the rules (starting rate and PSA) automatically.
Ways to Save Tax on Savings Interest
Although rules for savings tax must be followed, there are legal ways to reduce tax:
- Use ISAs, interest inside ISAs is always tax-free.
- Split savings with a spouse, each person gets their own PSA.
- Keep taxable income low, so starting rate for savings may still apply.
- Review timing of interest recognition where possible.
Conclusion
Tax on savings interest for 2025-26 depends on multiple allowances including the personal savings allowance and the starting rate for savings. For many savers, part of their savings interest may be tax-free, but rising interest rates mean more people are now exceeding these thresholds and paying tax.
Accountants should help clients understand how allowances interact with overall income, and show how tax on savings interest is calculated. Using calculators and clear examples helps clients avoid unexpected tax bills and plan savings more efficiently.
What is the personal savings allowance for 2025/26?
Basic rate taxpayers have £1,000 tax-free savings interest, higher rate £500, additional rate £0.
How much interest can I earn before paying tax on savings?
First use personal allowance, then the £5,000 starting rate (if eligible), then PSA before paying tax.
Is savings account interest taxable?
Yes, interest on savings is taxable unless covered by allowances or held in tax-free ISAs.
How do I know if I need to pay tax on savings interest?
If total interest after allowances exceeds your personal savings allowance or starting rate, you may owe tax.
What is the starting rate for savings in 2025/26?
Up to £5,000 savings interest may be tax-free if non-savings income is below a threshold.
How do I calculate tax on savings interest?
Apply personal allowance, starting rate, then personal savings allowance before taxing any remainder at your income tax rate.
Can I get a personal savings allowance calculator?
Yes many banks and financial services offer PSA calculators online.
Do I need to declare savings interest on my tax return?
If you’re self-employed or HMRC asks, include it; otherwise HMRC often collects through your tax code.
What is the tax rate on savings interest for 2025/26?
Interest above allowances is taxed at your usual income tax band (20%, 40% or 45%).
Are there ways to save tax on savings interest?
Yes use ISAs, split savings, and manage overall income to keep allowances available.
Parul is a dedicated writer and expert in the accounting industry, known for her insightful and well researched content. Her writing covers a wide range of topics, including tax regulations, financial reporting standards, and best practices for compliance. She is committed to producing content that not only informs but also empowers readers to make informed decisions.
