Most people pay no tax on their savings interest, because three allowances cover it: any unused Personal Allowance, the starting rate for savings, and the Personal Savings Allowance. This page explains the last two, how much you’d need saved to use them up, and when a cash ISA pays more.
The Personal Savings Allowance
Each tax year a basic rate taxpayer can earn £1,000 of savings interest tax-free, a higher rate taxpayer £500 and an additional rate taxpayer nothing; your band is worked out with your interest added to your other income.- Basic rate taxpayers: £1,000 of interest tax-free.
- Higher rate taxpayers: £500.
- Additional rate taxpayers: no Personal Savings Allowance (£0).
- To work out your band, add all your interest to your other income.
- Interest above the allowance is taxed at your usual Income Tax rate.
Your band includes your interest: if £50,000 of pay plus £1,000 of interest takes your income over the £50,270 higher rate threshold, you’re a higher rate taxpayer for this purpose and your allowance is £500.
The starting rate for savings
If your other taxable income (not counting savings interest or dividends) is less than £17,570, you can also earn up to £5,000 of interest tax-free, reduced by £1 for every £1 of other income above your Personal Allowance; you can get it as well as the Personal Savings Allowance.- Your other taxable income, not counting savings interest or dividends, is less than £17,570.
- The starting rate covers up to £5,000 of interest.
- Every £1 of other income above your Personal Allowance reduces it by £1.
- You can get it as well as the Personal Savings Allowance.
It mostly helps people with low earnings or pension income. For example, with £16,000 of wages, the £3,430 above the Personal Allowance reduces the starting rate to £1,570, and the Personal Savings Allowance comes on top.
How much you’d need saved to use it
At the August 2026 average 1-year fixed bond rate of 4.04%, it would take:
| Tax band | Personal Savings Allowance | Savings needed to earn that much interest in a year |
|---|---|---|
| Basic rate | £1,000 | about £24,752 |
| Higher rate | £500 | about £12,376 |
| Additional rate | £0 | any interest is taxable |
At the average instant access rate of 2.07%, earning £1,000 would take about £48,309. Work out your own position with the savings interest tax calculator.
What counts, and what doesn’t
Counts towards the allowance: interest from bank, building society and credit union accounts, and savings accounts generally, including interest on current accounts. HMRC adds together the interest from all your accounts.
Doesn’t count: interest in ISAs, which is tax-free, and some NS&I products, including Premium Bond prizes. Dividends have their own separate allowance. Children’s accounts have their own rules: see saving for a child.
Joint accounts. HMRC splits the interest on a joint account equally between the holders, so each of you sets your half against your own allowances. Contact HMRC if you think it should be split differently.
How the tax is collected
Banks pay interest without deducting tax. Banks and building societies tell HMRC after each tax year how much interest they paid you; with interest of £10,000 or less HMRC usually collects any tax through your tax code, and above that you report it on a Self Assessment return. In detail:
- After the tax year ends, your bank or building society tells HMRC how much interest you earned.
- If you already send a Self Assessment return, report the interest on it.
- If you're employed or get a pension, HMRC sends a tax calculation and usually collects the tax through your tax code, which may also include an estimate of this year's interest.
- If you don't have a tax code or it can't be changed, HMRC may send a Simple Assessment letter.
- If you have tax to pay and don't get a letter by 31 March after the tax year, you must contact HMRC.
- Interest of more than £10,000 must go on a Self Assessment return; register if you don't already send one.
HMRC’s tax calculations are usually sent between June and the following March.
If you’ve paid tax on interest when your total income was below your Personal Allowance, you can claim it back for up to 4 years after the end of the tax year.
Cash ISA or savings account?
While your interest stays within your allowances, a savings account’s interest is effectively tax-free, so choose on the rate alone. Once it goes over, compare the after-tax rates: for a higher rate taxpayer, a savings account paying 4% is worth 2.4% after 40% tax on interest above the allowance, so a cash ISA paying more than that wins on that money.
| Your position | What usually pays more |
|---|---|
| Interest well within your allowances | The highest rate, ISA or not |
| Basic rate, interest near or over £1,000 | A cash ISA, unless the savings account pays clearly more |
| Higher rate, interest near or over £500 | A cash ISA for savings above the allowance |
| Additional rate | A cash ISA: all interest outside one is taxed |
Two things tip the balance towards a cash ISA even if you’re within your allowance now: money in an ISA stays tax-free in future years, when your savings, your income or rates may be higher; and from 6 April 2027 the tax rates on savings interest are 2 percentage points higher: 22%, 42% and 47%. From the same date, the most people under 65 can put into cash ISAs is £12,000 a year of their £20,000 ISA allowance. For the ISA rules, see the ISA guides.
Related guides
- Savings accounts guide: the account types, average rates, tax and protection in one place
- Savings interest tax calculator: the tax on your interest, from your income
- Fixed rate bonds: when interest on a multi-year bond is taxed
- ISA guides: allowances, types and transfers