£25,000 Savings at 5% — Tax on Interest 2025-26
Annual interest earned: £1,250 · Personal Savings Allowance applied
Tax breakdown — £25,000 savings at 5%
| Taxpayer band | PSA | Taxable interest | Tax owed | Net interest |
|---|---|---|---|---|
| Basic rate (salary ≤ £50,270) | £1,000 | £250 | £50 @20% | £1,200 |
| Higher rate (£50,270–£125,140) | £500 | £750 | £300 @40% | £950 |
| Additional rate (over £125,140) | Nil | £1,250 | £563 @45% | £687 |
Frequently asked questions
How much tax do I pay on interest from £25,000 savings at 5%?
Interest earned: £1,250/year. Basic rate taxpayer (salary under £50,270): tax £50, net interest £1,200 — the first £1,000 is covered by your Personal Savings Allowance. Higher rate taxpayer (salary £50,270-£125,140): tax £300, net £950 (PSA is only £500). Additional rate taxpayer (salary over £125,140): no PSA, tax £563, net £687.
What is the Personal Savings Allowance for 2025-26?
The PSA allows basic rate taxpayers to earn £1,000 in savings interest tax-free per year, and higher rate taxpayers £500. Additional rate taxpayers (over £125,140) have no PSA — all interest is taxed at 45%. ISA interest is always tax-free and does not count toward the PSA.
At 5%, what balance triggers a tax bill for a basic rate taxpayer?
A basic rate taxpayer's PSA covers £1,000 of interest. At 5% interest, this is used up at a balance of £20,000. With £25,000 at 5%, your interest is £1,250, so you exceed the PSA by £250, which is taxed at 20%, giving a bill of £50.
Should I put £25,000 in an ISA or savings account?
A cash ISA pays tax-free interest regardless of your tax band. A regular savings account uses your PSA first (but at 5% on £25,000 you earn £1,250, exceeding the basic rate PSA of £1,000). If you are a higher or additional rate taxpayer, an ISA is more valuable. Basic rate taxpayers may not benefit from an ISA if interest stays within their £1,000 PSA.
Do I need to declare savings interest on £25,000 to HMRC?
If your total savings interest exceeds your Personal Savings Allowance (£1,000 basic rate / £500 higher rate / nil additional rate), you must declare the excess to HMRC. At 5% on £25,000, your interest is £1,250/year. This exceeds the basic rate PSA, so basic rate taxpayers pay tax on £250, and higher/additional rate taxpayers owe more. HMRC may collect this via PAYE coding or Self Assessment.
How much will £25,000 grow to in 5 years at 5%?
With compound interest at 5% per year, £25,000 grows to approximately £31,907 after 5 years and £40,722 after 10 years (before tax). Each year you earn roughly £1,250 in interest, which then compounds. If you are a basic rate taxpayer, the after-tax interest is £1,200/year, giving a net compound balance of approximately £31,604 after 5 years.