How much savings interest is tax-free? Tax on savings interest explained
With interest rates higher than they were for years, a lot more people are earning enough savings interest to owe tax on it, often without realising. The good news is that two separate allowances mean most basic-rate taxpayers still pay nothing. Here's how it fits together.
The Personal Savings Allowance
The Personal Savings Allowance (PSA) lets you earn a chunk of interest tax-free each year. How much depends on your Income Tax band:
| Your highest tax band | Tax-free savings interest |
|---|---|
| Basic rate (20%) | £1,000 |
| Higher rate (40%) | £500 |
| Additional rate (45%) | £0 |
So a basic-rate taxpayer can earn £1,000 of interest before any tax is due. At today's rates that still takes a fair-sized balance, but it's no longer out of reach the way it was when rates were near zero.
The £5,000 starting rate for savings
There's a second, less well-known allowance on top: the starting rate for savings. This is a £5,000 band taxed at 0%, aimed at people with low earned income. The catch is that it's reduced by your non-savings income above the Personal Allowance. If your wages or profit already use up that £5,000 of room (roughly, income over £17,570), the starting rate gives you nothing. But if you have low earnings and high savings (say a semi-retired person living partly off interest), it can shelter a lot of interest from tax.
Two worked examples
Low earnings, decent savings. You earn £16,000 in wages. That is £3,430 above the £12,570 Personal Allowance, so the £5,000 starting rate shrinks by £3,430 to £1,570. Add the £1,000 Personal Savings Allowance and the first £2,570 of your interest is tax-free.
Basic-rate taxpayer, £1,300 of interest. The first £1,000 is covered by the Personal Savings Allowance. The other £300 is taxed at 20%, so the bill is £60.
Both examples follow the ones HMRC itself uses on GOV.UK.
How much savings before you pay tax?
There is no limit on the balance itself, only on the interest it earns. As a rough guide, at 4% interest a basic-rate taxpayer would need about £25,000 in an ordinary savings account before the interest passes £1,000. A higher-rate taxpayer hits the £500 limit at about £12,500. Lower rates mean a larger balance before tax starts, higher rates a smaller one.
When interest is actually taxed
Above these allowances, savings interest is taxed at your normal Income Tax rate (20%, 40% or 45%) depending on the band it falls into. Interest sits below dividends but above your earned income in the stacking order, and an SA302 shows it on its own lines with the relevant allowance.
Do you need to report it?
Banks report the interest they pay you to HMRC. If you're employed and the amount is modest, HMRC may simply adjust your tax code to collect any tax due, without you filing anything. If you're already in Self Assessment, as most self-employed people are, you include your savings interest on your return, and it's taxed as part of the whole calculation.
ISAs stay outside all of this
Interest earned inside a cash ISA is tax-free and doesn't use up your Personal Savings Allowance at all. For people who regularly breach the PSA, moving savings into an ISA is the simplest way to keep the interest out of the tax net entirely.
A change coming in April 2027
The government has announced that from 6 April 2027 savings interest above the allowances will be taxed at 22%, 42% and 47%, two points higher than the current rates. The £1,000 and £500 allowances and the £5,000 starting rate are not changing. Rates can move at any Budget, so check GOV.UK before relying on a figure for a future year.
Check the effect on your bill
Enter your savings interest alongside your other income in the estimator to see whether it tips you into a tax charge and how the allowances apply to your figures. For the wider picture, our guide on how the calculation works shows where savings sit in the order.
Frequently asked questions
How much savings interest is tax-free in the UK?
£1,000 a year for a basic-rate taxpayer, £500 for a higher-rate taxpayer and £0 for an additional-rate taxpayer, under the Personal Savings Allowance. If your other income is below £17,570 you may also get up to £5,000 tax-free under the starting rate for savings. Interest in an ISA is tax-free on top of all of this.
How much savings can I have before paying tax?
Tax depends on the interest, not the balance. At 4% interest, a basic-rate taxpayer could hold about £25,000 before the interest passes the £1,000 allowance, and a higher-rate taxpayer about £12,500 before passing £500. Money in an ISA is not counted.
What rate of tax do I pay on savings interest?
Interest above your allowances is taxed at your normal Income Tax rate: 20%, 40% or 45% depending on your band. The government has announced these rise to 22%, 42% and 47% from 6 April 2027.
Do I need to tell HMRC about my savings interest?
Banks report interest to HMRC. If you are employed and do not file a tax return, HMRC usually collects any tax by changing your tax code. If you already file Self Assessment, you include the interest on your return.
Does ISA interest count towards the Personal Savings Allowance?
No. Interest earned inside an ISA is tax-free and does not use up any of your Personal Savings Allowance or starting rate for savings.