Do I Pay Tax on Savings Interest in the UK? 2025-26
With savings rates at multi-year highs, many more people are now liable to tax on their interest. Here is exactly how savings taxation works in the UK for 2025-26.
How Savings Interest Is Taxed
Interest from savings accounts, current accounts, fixed-rate bonds, and peer-to-peer lending is taxable as income in the UK. It is added to your other income (salary, pension, etc.) and taxed at your marginal income tax rate — 20%, 40%, or 45%.
However, most people do not pay tax on their savings interest because of the Personal Savings Allowance (PSA), which provides a tax-free threshold for interest income.
The Personal Savings Allowance 2025-26
The PSA is the amount of savings interest you can earn tax-free each year. Your PSA depends on your income tax band:
| Tax Band | Annual Income | Personal Savings Allowance |
|---|---|---|
| Basic rate taxpayer | Up to £50,270 | £1,000 |
| Higher rate taxpayer | £50,271 – £125,140 | £500 |
| Additional rate taxpayer | Above £125,140 | £0 |
Interest within your PSA is tax-free. Interest above the PSA is taxed at your marginal rate. For example, a basic rate taxpayer earning £1,200 in interest pays tax on £200 (£1,200 − £1,000 PSA) at 20%, giving a tax bill of £40.
The Starting Rate for Savings
There is an additional relief available to people with low non-savings income. If your total non-savings income (salary, pension, etc.) is below £17,570, you may benefit from a 0% "starting rate" on savings interest up to £5,000.
The starting rate band is reduced by £1 for every £1 of non-savings income above £12,570. So if your salary is £14,000, your starting rate band is £5,000 − (£14,000 − £12,570) = £3,570. Combined with the PSA, a low-income taxpayer could receive up to £6,000 in interest tax-free.
ISA Accounts — Always Tax-Free
Interest and returns earned inside an ISA (Individual Savings Account) are completely exempt from income tax and capital gains tax. They do not count towards your PSA and you do not need to declare them to HMRC.
The annual ISA allowance for 2025-26 is £20,000 per person. Types of ISA include:
- Cash ISA — savings accounts paying interest tax-free
- Stocks and Shares ISA — investment growth and dividends tax-free
- Lifetime ISA — up to £4,000/year with 25% government bonus (for first homes or retirement)
- Innovative Finance ISA — peer-to-peer lending tax-free
How HMRC Collects Tax on Savings Interest
Banks and building societies report the interest they pay to HMRC automatically each year. HMRC uses this information in two ways:
- PAYE tax code adjustment: If you are employed or receive a pension and your excess interest is modest, HMRC adjusts your tax code to collect the tax through your pay packets the following year.
- Self Assessment: If your total untaxed income exceeds £1,000, or you have complex tax affairs, HMRC may require you to file a Self Assessment return to declare and pay the tax.
Banks no longer deduct tax at source from savings interest (this changed in April 2016), so interest is paid gross. It is your responsibility to pay any tax due.
Premium Bonds and NS&I
Premium Bond prizes from National Savings and Investments (NS&I) are completely tax-free — they are not classed as interest and do not count towards your PSA. The same applies to the NS&I Direct Saver and other NS&I products: interest is tax-free and exempt from reporting to HMRC.
Joint Accounts
For joint savings accounts, the interest is typically split 50:50 between the account holders for tax purposes, unless you inform HMRC of a different split. Each holder uses their own PSA against their share of the interest.
Frequently Asked Questions
What is the Personal Savings Allowance for 2025-26?
The PSA is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers have no PSA. Interest within these limits is tax-free.
Is interest earned in an ISA taxable?
No. Interest and returns inside an ISA are completely tax-free and do not count towards your PSA. The annual ISA allowance for 2025-26 is £20,000.
How does HMRC find out about my savings interest?
Banks and building societies report interest paid to HMRC automatically. HMRC uses this to adjust your PAYE code or prompt Self Assessment filing.
What savings interest triggers a Self Assessment requirement?
Generally if your total untaxed income exceeds £1,000, or your interest exceeds your PSA and cannot be collected through PAYE, you may need to file a Self Assessment return.