Tax on Savings Interest UK: Personal Savings Allowance Explained 2025
With savings rates back above 4-5%, many people are earning more interest than they've seen in years - and crossing tax thresholds they never expected to reach. Here's how savings interest is taxed in the UK, who owes what, and how to structure your savings to keep as much interest as possible.
How Savings Interest Is Taxed
Savings interest is classed as income and taxed at your income tax rate - 20% for basic rate taxpayers, 40% for higher rate, 45% for additional rate. But before tax kicks in, most people have a tax-free allowance called the Personal Savings Allowance (PSA).
Interest from savings accounts, current accounts, fixed-rate bonds, peer-to-peer lending, and most other deposit-based products counts as savings income. Interest from ISAs does not - it's completely exempt and doesn't use up any of your PSA.
With a savings rate of 4.5% on a standard easy-access account, a basic rate taxpayer needs around £22,000 in savings before their interest exceeds the £1,000 Personal Savings Allowance. A higher rate taxpayer reaches their £500 allowance at roughly £11,000. Anyone earning over £125,140 has no allowance at all and pays 45% tax on every pound of interest from the first pound.
The Personal Savings Allowance
| Tax Band | Personal Savings Allowance | Tax Rate Above Allowance |
|---|---|---|
| Basic rate taxpayer | £1,000 | 20% |
| Higher rate taxpayer | £500 | 40% |
| Additional rate taxpayer | None | 45% |
Your tax band is determined by your total income including salary, self-employment income, rental income, and other taxable income. Savings interest itself sits on top of your other income when calculating which band applies.
The PSA is per person per tax year and cannot be carried forward. It also cannot be transferred to a spouse.
The Starting Rate for Savings - Often Missed
There is an additional allowance that many people with lower incomes don't know about: the Starting Rate for Savings. For 2025/26, up to £5,000 of savings interest can be taxed at 0% if your other income (salary, pension, self-employment - not including savings interest) is below £17,570.
How it works: the Starting Rate band is £5,000, but it is reduced by £1 for every £1 of non-savings income above the Personal Allowance (£12,570). So:
- If your only income is savings interest, you could earn up to £17,570 (£12,570 Personal Allowance + £5,000 starting rate) completely tax-free
- If you earn £15,000 in pension or employment income, your starting rate band is reduced by £2,430 (£15,000 minus £12,570), leaving £2,570 of savings interest at 0%
- If your non-savings income exceeds £17,570, the starting rate band is fully used up and doesn't help
Retired people with modest pension income, part-time workers, and anyone with total non-savings income below £17,570 can potentially earn thousands of pounds of savings interest tax-free by combining the Personal Allowance, the Starting Rate for Savings, and the Personal Savings Allowance. A retired person with a £10,000 State Pension could earn up to £8,570 of tax-free savings interest (£5,000 starting rate band reduced by £0 because income is below £12,570, plus £1,000 PSA, plus £2,570 remaining Personal Allowance gap = more than £8,000 tax-free).
ISA vs Standard Savings Account
The question every saver faces is whether to use a Cash ISA or a standard savings account. The right answer depends on your tax position and the rates on offer.
If your total savings interest will stay within your Personal Savings Allowance (£1,000 for basic rate, £500 for higher rate), a standard savings account paying the best rate beats a Cash ISA paying a lower rate - you won't owe any tax either way, so the rate alone decides it.
If your savings interest will exceed your allowance, the comparison changes. A Cash ISA at a lower rate might generate more after-tax income than a standard account at a higher rate, once you factor in 20% or 40% tax on the excess interest outside the ISA.
The maths to compare:
- Standard account interest above allowance (basic rate taxpayer): rate x 0.80 = after-tax yield
- Standard account interest above allowance (higher rate taxpayer): rate x 0.60 = after-tax yield
- Cash ISA: rate x 1.00 = after-tax yield (no tax deducted)
If the Cash ISA rate is within 0.25% of the best standard account rate and you're a basic rate taxpayer with savings above £20,000, the ISA likely wins once the tax saving is factored in.
How HMRC Collects Tax on Savings Interest
Banks and building societies report interest paid to HMRC automatically at the end of each tax year. HMRC then works out whether you owe tax based on your income and PSA position:
- Employees and pensioners on PAYE: HMRC adjusts your tax code to collect any savings tax owed through future payslips or pension payments
- Self Assessment filers: You include savings interest on your Self Assessment return and pay any tax owed with your annual bill
- People not on PAYE or Self Assessment: HMRC will contact you directly if tax is owed, or you can contact them to pay
You don't need to proactively contact HMRC if your interest is within your PSA - no tax is owed and nothing needs reporting.
Some fixed-rate savings bonds pay interest only at maturity - meaning several years' worth of interest arrives in a single tax year. If a 3-year bond paying 4.5% on £50,000 matures and pays out £6,750 of interest in one year, all £6,750 lands in that single tax year against your PSA. You could face a large unexpected tax bill from one lump payment. If you're considering fixed-rate bonds, check whether interest is paid annually (spreading the tax liability) or at maturity (concentrating it).