What is Tax on Savings Interest? Understanding Tax on Savings

Personal savings income is usually taxable so it’s essential to have a clear understanding of how income tax affects our savings and investments.

Tax isn’t always payable on savings interest and sometimes if tax has been deducted you can be owed a refund.

Whether you’re earning interest from a savings, bank, or building society account knowing the ins and outs of tax on savings can help you make informed decisions and optimise your financial strategy.

Our tax savings guide covers how to calculate tax on your savings based on your income bracket, explains how HMRC collects this tax, and reveals strategies to maximise your personal savings allowance (PSA).

Basic rate taxpayer or higher bracket – you’ll understand savings tax clearly after reading this straightforward explanation.

If you’ve paid too much tax on your savings income we’ll let you know what you can do to recover the income tax you are owed from HMRC.

What types of savings are subject to tax?

In general the majority of income earned from savings is subject to income tax.

If your savings income is not taxable you would typically be aware of this because you would be making use of a specific tax free savings product.

The most common forms of taxable savings accounts originate from sources including:

• Building Societies.
• Banks.
• Credit union.
• Investment trusts.
• Unit trusts.
• Life annuities.
• Life insurance.
• Peer to peer lending.
• Company and government bonds.

If you’re not sure if your savings income is taxable you can ask the provider of your savings account for confirmation.

There are some options available to save tax free with tax free cash ISA’s and premium bonds popular examples.

As part of the signing up process to a tax free savings account you should be made aware of any tax free element of your income from that product.

Tax free savings allowance

When it comes to paying tax on savings understanding your taxable income and personal allowance is crucial.

The personal allowance is the amount of income you can earn before having to pay income tax. It applies to all taxable income and not just income from savings.

For example if you have a personal allowance of £12,570 this means you can earn up to that threshold tax free.

Everyone gets the personal allowance and you can use it to earn income from savings tax free if you haven’t exhausted it on other sources of income such as wages or pensions.

Once your total taxable income (including income from savings and investments) exceeds your personal and savings allowances you’ll begin paying income tax.

Tax free Savings: Starting rate for savings

The starting rate for savings is a tax break on interest designed to benefit individuals with a lower income.

The starting rate allows you to earn interest on savings up to £5,000 without incurring any income tax.

It’s important to note that the starting rate for savings reduces by £1 for every £1 of other income above your personal allowance.

To put it simply if you earn more than your personal allowance from sources such as wages or pensions, the starting rate for savings will decrease accordingly.

As an example this means that you can earn up to £17,570 in the 2025-26 tax year before having to pay any tax on savings interest.

For people on lower incomes looking into using a government Help to Save Account can help build savings in a tax free and easy way.

Tax free savings: Personal savings allowance

The personal savings allowance (PSA) provides an additional tax free threshold for interest earned on savings.

You can use the PSA in addition to the personal allowance to increase your overall income that isn’t taxable.

The amount you can earn tax free depends on which income tax bracket your income falls into:

• Basic rate taxpayers have a personal savings allowance of £1,000 per tax year.
• Higher rate taxpayers have a personal savings allowance of £500 per tax year.
• Additional rate taxpayers do not receive a personal savings allowance. This means that additional rate taxpayers (earning over £125,140 annually) must pay tax on all their taxable savings interest.

The PSA isn’t transferrable and you can’t carry forward any unused personal savings allowance to use in a future tax year.

Tax brackets for savings interest

While the personal savings allowance allows you to earn interest tax free, it’s crucial to understand that savings income within the allowance still counts towards your overall income.

This means that if your savings income pushes you into a higher tax bracket it may affect the level of personal savings allowance you’re entitled to.

For example, let’s consider a scenario where you’re a basic rate taxpayer earning enough interest from savings to cross the higher rate tax threshold.

In this case, you’ll only be entitled to a £500 personal savings allowance and will pay 40% tax on the remaining savings interest that falls within the higher tax bracket.

While the higher rate threshold works slightly differently in Scotland the personal savings allowance works in the same way as in the rest of the UK.

The income tax rates for England, Wales, and Northern Ireland are as follows:

• The personal allowance is taxed at a rate of 0% and applies to income from £0 to £12,570.
• The basic rate is taxed at a rate of 20% and applies to income from £12,571 to £50,270.
• The higher rate is taxed at a rate of 40% and applies to income from £50,271 to £125,140.
• The additional rate is taxed at a rate of 45% and applies to income over £125,140.

How to pay tax on savings interest

The process of paying tax on savings depends on the way you pay income tax to HMRC.

Paying tax on savings through self assessment:

If you pay tax through the self assessment system you should normally report your savings income as part of your self assessment tax return. Any tax payable on savings income will form part of your overall self assessment tax bill.

Paying tax on savings employed under PAYE:

If you’re employed or receiving a pension through PAYE HMRC will usually adjust your tax code from that income to account for the tax owed from your savings. This adjustment usually happens automatically for savings interest.

If you’re not employed, don’t have a pension, or don’t complete a self assessment tax return your bank or building society will inform HMRC about the interest you received at the end of the year.

HMRC will then notify you if you need to pay income tax and provide instructions on how you should pay them.

Claiming back overpaid tax on savings

In certain situations you may be eligible to reclaim tax that you’ve overpaid on your savings interest.

If you don’t complete a self assessment tax return you can fill out form R40 to claim the overpayment of income tax back from HMRC.

HMRC let you complete and submit the R40 online or by post.

It’s worth noting that you can claim tax back on savings and investments for the past four tax years and the refund process usually takes around six weeks (depending on HMRC timescales).

For savers who complete a self assessment tax return any refund will be calculated and repaid after your tax return has been processed by HMRC.

You can correct a tax return within 12 months of the self assessment deadline, either online or by submitting another paper return.

If you miss the deadline or need to make changes to a return from a previous tax year you’ll need to contact HMRC by writing a letter.

Help to save for lower incomes

Help to Save accounts provide a government backed opportunity for individuals with lower incomes to establish savings and enhance their financial prospects.

For a limited period of four years only a help to save account offers numerous advantages and rewards to promote consistent saving.

These benefits include a 50% bonus on savings, tax-free income from savings, the flexibility to make deposits at your convenience, and no limitations on the duration of the account (within the four year period).

The process of opening a help to save account is generally uncomplicated with no forms needing to be submitted because HM Revenue & Customs (HMRC) will assess your eligibility on your behalf.

You can use our help to save guide to find out more about qualifying criteria and the benefits of using the governments help to save scheme.

Key Takeaways

Understanding UK savings tax can help you maximise your tax-free earnings and avoid unexpected bills from HMRC.

• Basic rate taxpayers can earn £1,000 interest tax-free annually, whilst higher rate taxpayers receive £500 and additional rate taxpayers get nothing.

• Low earners under £17,570 may qualify for up to £18,570 tax-free through combined Personal Allowance, Starting Rate for Savings, and Personal Savings Allowance.

• HMRC automatically collects savings tax through PAYE code adjustments for employees, based on previous year’s interest earnings reported by banks.

• ISAs provide completely tax-free interest earnings that don’t count towards your Personal Savings Allowance, making them ideal for higher savers.

• Joint account holders are typically taxed on 50% of interest each, but you can elect different splits using form 17 if contributions are unequal.

The key to effective savings tax management is knowing your income bracket and utilising all available allowances strategically.

Regular monitoring of your tax code changes ensures you’re prepared for any adjustments HMRC makes throughout the year.

Tax on Interest FAQs

Q1. How is tax calculated on savings interest in the UK? Tax on savings interest is calculated based on your overall income and tax bracket. Basic rate taxpayers can earn up to £1,000 in interest tax-free, higher rate taxpayers can earn £500 tax-free, while additional rate taxpayers have no tax-free allowance. Any interest earned above these thresholds is taxed at your marginal tax rate.

Q2. What is the maximum amount of savings interest I can earn tax-free in the UK? The maximum tax-free savings interest depends on your income. If you earn less than £17,570 annually, you could potentially earn up to £18,570 in tax-free interest by combining your Personal Allowance (£12,570), Starting Rate for Savings (£5,000), and Personal Savings Allowance (£1,000).

Q3. How does HMRC collect tax on savings interest? HMRC typically collects tax on savings interest through PAYE for employed individuals by adjusting their tax code. Self-employed individuals report interest on their Self Assessment tax return. Banks and building societies report your savings interest directly to HMRC at the end of each tax year.

Q4. Are there any savings accounts where I don’t have to pay tax on the interest? Yes, Individual Savings Accounts (ISAs) are tax-free savings accounts. All interest earned in an ISA is completely tax-free and doesn’t count towards your Personal Savings Allowance, making them particularly attractive for those with substantial savings.

Q5. How is tax handled on joint savings accounts? For joint accounts, spouses and civil partners are typically taxed on 50% of the interest each, regardless of who contributed the funds. However, if your shares are unequal, you can elect to be taxed according to actual beneficial interests using form 17.