Higher interest rates over the past couple of years have been good news for savers, but they've also pushed a lot more people over the line into paying tax on their savings interest for the first time.
If you've had a letter from HMRC about interest, or you're just not sure whether you owe anything, this guide is for you. We'll explain how tax on savings interest actually works in 2025/26, what the Personal Savings Allowance covers, and a few legitimate ways to keep more of your interest tax-free.
It's written for everyday savers, but it's just as relevant if you're a sole trader or company director with money sitting in a personal savings account.
How is savings interest taxed in the UK?
Savings interest is taxable income, but most people pay nothing on it because of a stack of allowances that sit on top of each other.
Banks and building societies now pay interest gross, meaning no tax is taken off before it reaches you. If you owe anything, it's collected separately (more on that below).
The following all count as taxable savings interest:
- Bank and building society accounts
- Savings and credit union accounts
- Government or company bonds
- Life annuity payments and some life insurance contracts
- Peer-to-peer lending
- Interest from unit trusts, investment trusts and open-ended investment companies
A few things are kept out of the tax net entirely. Interest earned inside an ISA doesn't count, and neither does most National Savings and Investments (NS&I) interest. Premium Bond prizes are tax-free too, so they never use up any of your allowances.
What is the Personal Savings Allowance?
The Personal Savings Allowance (PSA) is the amount of savings interest you can earn each tax year before any tax is due. How much you get depends on your highest rate of Income Tax.
| Your Income Tax band | Personal Savings Allowance (2025/26) |
|---|---|
| Basic rate (20%) | £1,000 |
| Higher rate (40%) | £500 |
| Additional rate (45%) | £0 |
The PSA is per person, not per account. If your only taxable savings interest for the year comes in under your allowance, there's nothing to pay and usually nothing to report.
Your tax band is set by your total income, including the savings interest itself. The basic rate applies to taxable income above the personal allowance up to £37,700, the higher rate from total income of £50,271, and the additional rate above £125,140 (for 2025/26).
What is the starting rate for savings?
On top of the PSA, there's a separate band called the starting rate for savings. It lets you earn up to £5,000 of savings interest at a 0% tax rate.
The catch is that it's aimed squarely at people with low non-savings income, so it tapers away as your other earnings rise. Every £1 of other income (such as wages, pension or self-employment profit) above your personal allowance reduces the starting rate band by £1.
In practice that means if your non-savings income is £17,570 or more, the starting rate band is fully used up and you get none of it. That £17,570 is simply the personal allowance of £12,570 plus the £5,000 starting rate band.
This band is most useful for people with modest pensions or part-time income alongside a chunk of savings.
How much savings interest can I earn tax-free?
For a basic-rate taxpayer whose income is mostly from savings, the three layers stack up to a generous total.
| Allowance (2025/26) | Amount |
|---|---|
| Personal allowance | £12,570 |
| Starting rate for savings (0% band) | £5,000 |
| Personal Savings Allowance (basic rate) | £1,000 |
| Maximum tax-free total | £18,570 |
So in the best case, someone with no other income could receive up to £18,570 of savings interest in 2025/26 without paying a penny of tax on it.
That headline figure only applies if your personal allowance and the full starting rate band are free to sit against savings. The more you earn from wages, a pension or self-employment, the more those two layers get eaten up, leaving just the PSA.
Worked examples: how the tax is calculated
Here are three illustrative examples using 2025/26 figures. The names and numbers are made up to show the mechanics.
Illustrative example 1: basic-rate employee
Tom earns £30,000 in salary and £1,200 in savings interest.
- His salary alone is well above the personal allowance, so the £5,000 starting rate band is fully tapered away to nil.
- As a basic-rate taxpayer, he gets the £1,000 PSA.
- £1,000 of his interest is covered. The remaining £200 is taxed at 20%, so £40 is due.
Illustrative example 2: higher-rate employee
Sara earns £60,000 in salary and £900 in savings interest.
- Her income makes her a higher-rate taxpayer, so her PSA is £500.
- £500 of her interest is tax-free. The remaining £400 is taxed at 40%, so £160 is due.
Illustrative example 3: low non-savings income
Margaret has £16,000 from a pension and £2,000 in savings interest.
- Her personal allowance (£12,570) covers most of her pension, leaving £3,430 of pension to be taxed.
- That £3,430 reduces her £5,000 starting rate band, leaving £1,570 of 0% band available for savings.
- On top of that she has the £1,000 PSA, so £1,570 + £1,000 = £2,570 of interest can be tax-free.
- Her £2,000 of interest fits inside that, so she pays no tax on her savings interest at all.
If you'd rather not do this by hand, our Income Tax calculator helps you see where your total income lands across the bands.
How do I actually pay the tax?
You don't usually need to do anything to claim the PSA or the starting rate, they're applied automatically. Paying any tax due works in one of three ways.
- If you're employed or get a pension, HMRC usually changes your tax code so the tax is collected through PAYE across the year.
- If you complete a Self Assessment tax return, you report the interest on your return and pay it that way. This is the route for most sole traders and company directors.
- If you do neither, your bank or building society reports your interest to HMRC after the tax year ends, and HMRC works out anything owed.
If you run your own business, savings interest sits alongside your trading profits or dividends on your return, so it's worth getting the full picture right. Our Self Assessment service takes care of that, and if you operate through a company our notes for limited company directors and sole traders explain how personal interest fits with the rest of your income.
How can I pay less tax on my savings interest?
There's no trick to this, just sensible use of the allowances everyone already has. A few practical moves:
- Use your ISA allowance. Interest inside a cash ISA is completely outside the tax system and never touches your PSA. Moving taxable savings into an ISA is the simplest fix.
- Spread savings between spouses or civil partners. Each of you has your own PSA. If one of you is a basic-rate taxpayer (£1,000 PSA) and the other is a higher-rate taxpayer (£500 PSA), holding more of the savings in the basic-rate partner's name can cut the household's overall tax on interest.
- Watch the band thresholds. A bit of extra interest can tip you from basic to higher rate, which halves your PSA from £1,000 to £500. Knowing where you sit before year end helps you plan.
- Consider NS&I and Premium Bonds for tax-free returns if your ISA allowance is already used up, bearing in mind the trade-off on rates and the chance-based nature of Premium Bond prizes.
These are general pointers rather than personal advice. The right mix depends on your full income picture, which is exactly where a quick conversation pays off.
Want to make sure you're using every allowance you're entitled to? Book a free call with a Zmartly accountant and we'll review your savings and income together.
Frequently asked questions
Do I need to declare savings interest to HMRC?
If your interest is within your Personal Savings Allowance and any starting rate band, there's usually nothing to declare or pay. If you go over and you complete a Self Assessment return, you include the interest there. If you don't file a return, banks report your interest to HMRC, which collects any tax due, often by adjusting your tax code.
Does ISA interest count towards my Personal Savings Allowance?
No. Interest earned inside an ISA is tax-free and doesn't count towards your PSA or the starting rate for savings. The same applies to most NS&I products and Premium Bond prizes.
How much savings interest is tax-free in 2025/26?
It depends on your other income. A basic-rate taxpayer gets a £1,000 PSA. Someone with very low non-savings income can also use the £5,000 starting rate band and the £12,570 personal allowance, giving up to £18,570 of tax-free interest in 2025/26.
Does savings interest affect my tax band?
Yes. Savings interest is part of your total taxable income, so a large amount of interest can push you from the basic rate into the higher rate. That matters because the higher-rate PSA (£500) is half the basic-rate PSA (£1,000) for 2025/26.
Can I move savings to my spouse to pay less tax?
Yes, this is legitimate. Each person has their own Personal Savings Allowance, so holding more of the savings in the name of the lower-rate partner can reduce the household's total tax on interest. The money does need to genuinely belong to the person whose name it's in.
