Tax on savings interest

Most employees pay no tax on savings interest, because the Personal Savings Allowance lets a basic-rate taxpayer receive £1,000 of interest a year tax-free and a higher-rate taxpayer £500. Additional-rate taxpayers get no allowance. People on low incomes can also use the starting rate for savings, which makes up to £5,000 more interest tax-free. Interest above your allowances is taxed at your normal rate of 20, 40 or 45 per cent in 2026/27; these savings rates are due to rise to 22, 42 and 47 per cent from 6 April 2027.

The Personal Savings Allowance

Your Income Tax band	Personal Savings Allowance
Basic rate	£1,000
Higher rate	£500
Additional rate	£0

Your band depends on your total taxable income, including the interest. If you earn just under the higher-rate threshold, a large amount of interest can tip you over it and reduce your allowance.

Public sector pension contributions are taken off before tax, so they reduce your taxable income. An NHS, teaching, council or Civil Service employee whose gross salary is a little over £50,270 can still be a basic-rate taxpayer once the pension is deducted, and so keep the £1,000 allowance.

The starting rate for savings

The starting rate for savings lets you receive up to £5,000 of interest at 0 per cent. It is aimed at people with low earnings, so it shrinks as your other income rises. For every £1 of other income above your £12,570 personal allowance, the £5,000 falls by £1. Once your other income reaches £17,570, it is gone.

As a hypothetical example, say you work part time and your taxable pay is £15,000 a year. That is £2,430 above the personal allowance, so your starting rate band is £5,000 minus £2,430, which is £2,570. You also have the £1,000 Personal Savings Allowance, so up to £3,570 of interest would be tax-free.

Worked examples

A full-time NHS band 5 nurse earning £32,073 is a basic-rate taxpayer. If they earn £1,300 of interest in 2026/27, the first £1,000 is covered by the allowance and the remaining £300 is taxed at 20 per cent, so the tax is £60.

An NHS band 8a manager in England on the entry point of £57,528 pays 10.7 per cent into the NHS Pension Scheme, leaving about £51,373 of taxable pay. That is above £50,270, so they are a higher-rate taxpayer with a £500 allowance. On £800 of interest, £300 is taxed at 40 per cent, which is £120.

In both cases the earnings are too high for the starting rate.

Scotland

Scottish rates and bands apply only to earnings and other non-savings income. Savings interest is taxed at the UK savings rates of 20, 40 and 45 per cent, even for Scottish taxpayers. If your income is close to one of the Scottish or UK thresholds, HMRC can confirm which allowance applies to you.

How the tax is collected

Banks and building societies pay interest without taking tax off, and report it to HMRC. If you owe tax, HMRC usually collects it by adjusting your tax code. Often it uses last year’s interest as an estimate for this year, which can produce a reduced allowance on your code for interest you no longer earn. If your savings or interest rate have changed, update the estimate in your personal tax account.

If you file a Self Assessment tax return, you declare the interest there instead. Any underpayment that HMRC finds after the end of the year is normally collected through a later tax code. Underpaid tax and tax code adjustments covers how that works.

What does not count

Some savings income is not taxed at all and does not use your allowance:

• interest and returns inside an ISA
• Premium Bond prizes
• some National Savings and Investments products, as listed by NS&I

Interest on current accounts does count. So does interest on fixed-rate bonds, but for a bond that pays everything at the end, the interest is usually taxed in the year it is paid or made available, which can push a large amount into a single tax year.

Changes from April 2027

From 6 April 2027 savings interest that is taxable will be charged at 22 per cent for basic-rate taxpayers, 42 per cent for higher-rate and 47 per cent for additional-rate taxpayers. Dividends are taxed under separate rules, which already changed this year. Dividends tax for employees with shares covers them.

For help with your own tax position, HMRC can answer questions about your code, and independent advice is available from charities such as TaxAid for people on lower incomes.