Tax on Savings Interest 2025-26: Personal Savings Allowance, ISAs, and HMRC Collection

With interest rates having risen sharply from near-zero, millions of UK savers are now earning meaningful interest on cash savings for the first time in over a decade. That interest is taxable income — and with the Personal Savings Allowance (PSA) frozen while savings rates have risen, more people than ever are now facing a tax bill on their savings. This guide explains how the PSA works, what happens when you exceed it, and how to reduce your savings tax bill legitimately.

The Personal Savings Allowance in 2025-26

The PSA was introduced in 2016 and has never been increased since. For 2025-26:

• Basic rate taxpayers (income up to £50,270): £1,000 of savings interest is tax-free.
• Higher rate taxpayers (income £50,271–£125,140): £500 of savings interest is tax-free.
• Additional rate taxpayers (income above £125,140): No Personal Savings Allowance — all savings interest is taxable.

Note that for Scottish taxpayers, the rate at which you use income (19%, 20%, 21%, 42%, 45%, 48%) does not change the PSA bands — those are based on UK income tax bands, not Scottish ones. A Scottish intermediate rate taxpayer (income £14,877–£26,561) is still classified as a basic rate taxpayer for PSA purposes and gets the £1,000 allowance.

What counts as savings income?

The PSA applies to interest from:

• Bank and building society savings accounts
• Fixed-rate bonds and term deposits
• Current accounts that pay interest
• Credit union accounts
• Peer-to-peer lending interest
• Government bonds (gilts) and corporate bonds

Dividends, ISA interest, and Premium Bond prizes are not savings income for PSA purposes (dividends have their own allowance; ISA and Premium Bond income is always tax-free).

How much do you need saved before exceeding the PSA?

At current savings rates (broadly 4%–5% AER for easy access in early 2025), a basic rate taxpayer would need approximately £20,000–£25,000 in savings to generate £1,000 of interest and breach the PSA. A higher rate taxpayer would breach their £500 PSA with around £10,000–£12,500 in savings.

These are relatively modest sums, meaning many ordinary savers are now paying tax on savings interest for the first time.

How HMRC collects tax on savings interest

Banks and building societies report the interest they pay to HMRC. HMRC then has several collection methods:

• PAYE tax code adjustment: For most employees and pensioners, HMRC will reduce your tax code to collect the savings tax automatically through your payslip or pension. You will receive a notice of coding (P2) explaining the change.
• Simple Assessment: For those outside PAYE (e.g. those with only State Pension income), HMRC may send a Simple Assessment letter with the tax due and payment instructions.
• Self Assessment: If you already file a Self Assessment return, savings interest is declared there under "UK interest and dividends."

Banks no longer deduct tax at source on savings interest (this practice ended in 2016). You receive gross interest and are responsible for the tax, but HMRC usually handles collection automatically for most taxpayers.

The Starting Rate for Savings — a little-known zero-rate band

There is an additional band called the Starting Rate for Savings of up to £5,000 at 0%. This applies only if your non-savings income (salary, pension, self-employment) is below £17,570 (£12,570 Personal Allowance + £5,000 band). For every pound of non-savings income above £12,570, the £5,000 band is reduced by £1. Most working-age taxpayers in employment will have exhausted this band entirely. But it can be valuable for those with low earned income and significant savings — such as retirees who have not yet drawn their pension.

Using ISAs to shelter savings interest

The most effective way to reduce or eliminate savings tax is to hold savings inside a Cash ISA. Interest in an ISA is completely exempt from tax — it does not even count towards the PSA. The annual ISA allowance is £20,000 per person. If you have savings outside an ISA that are generating taxable interest, consider transferring them to a Cash ISA (using an ISA transfer, not a withdrawal and new deposit, to preserve previous years' allowances).

Frequently asked questions

Do I need to tell HMRC about my savings interest?

If your interest is below your PSA, there is nothing to declare. If it exceeds your PSA, HMRC will usually find out via bank reporting and contact you — but it is your responsibility to ensure the tax is paid. If you receive a coding notice that seems wrong, check it and contact HMRC if necessary.

Can a couple double up on the PSA?

Each individual gets their own PSA. A basic rate taxpayer couple each gets £1,000, so jointly they shelter £2,000 of interest tax-free. If savings are jointly held, each partner is taxed on their share. Consider holding savings in the name of the lower-earning partner to make best use of allowances.