£40,000 Savings at 3% — Tax on Interest 2025-26
Annual interest earned: £1,200 · Personal Savings Allowance applied
Tax breakdown — £40,000 savings at 3%
| Taxpayer band | PSA | Taxable interest | Tax owed | Net interest |
|---|---|---|---|---|
| Basic rate (salary ≤ £50,270) | £1,000 | £200 | £40 @20% | £1,160 |
| Higher rate (£50,270–£125,140) | £500 | £700 | £280 @40% | £920 |
| Additional rate (over £125,140) | Nil | £1,200 | £540 @45% | £660 |
Frequently asked questions
How much tax do I pay on interest from £40,000 savings at 3%?
Interest earned: £1,200/year. Basic rate taxpayer (salary under £50,270): tax £40, net interest £1,160 — the first £1,000 is covered by your Personal Savings Allowance. Higher rate taxpayer (salary £50,270-£125,140): tax £280, net £920 (PSA is only £500). Additional rate taxpayer (salary over £125,140): no PSA, tax £540, net £660.
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 3%, what balance triggers a tax bill for a basic rate taxpayer?
A basic rate taxpayer's PSA covers £1,000 of interest. At 3% interest, this is used up at a balance of £33,333. With £40,000 at 3%, your interest is £1,200, so you exceed the PSA by £200, which is taxed at 20%, giving a bill of £40.
Should I put £40,000 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 3% on £40,000 you earn £1,200, 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.