Tax on Savings Interest Guide UK (Personal Savings Allowance 2026)

Personal Savings Allowance (£1,000 / £500 / £0)

The Personal Savings Allowance (PSA) lets you earn a set amount of savings interest each tax year without paying tax. The allowance depends on your income tax band: basic-rate taxpayers (income up to £50,270) get a £1,000 PSA, meaning the first £1,000 of savings interest is tax-free; higher-rate taxpayers (income between £50,271 and £125,140) get a £500 PSA; additional-rate taxpayers (income over £125,140) get no PSA at all. The PSA applies to interest from bank accounts, building societies, savings accounts, credit union accounts, and some bonds. It does not apply to ISA interest (which is already tax-free) or to dividend income. If your savings interest exceeds your PSA, the excess is taxed at your marginal income tax rate — 20% for basic-rate, 40% for higher-rate, and 45% for additional-rate. Your PSA is calculated based on your total income including savings interest, so earning more interest could push you into a higher tax band, reducing your PSA. Banks and building societies no longer automatically deduct tax from savings interest (since April 2016), so it is your responsibility to track your interest and report it if needed. Use the Savings Interest Calculator to check your position.

Starting Rate for Savings (Up to £5,000 Interest Tax-Free)

In addition to the Personal Savings Allowance, you may also be entitled to the starting rate for savings. This allows you to earn up to £5,000 of savings interest tax-free — but only if your non-savings income (wages, pension, rental income, etc.) is below a certain threshold. The starting rate is available if your total taxable non-savings income is less than £17,570 (2026/27). For every £1 of non-savings income above your Personal Allowance (£12,570), the starting rate band reduces by £1. So if your non-savings income is £12,570 (the Personal Allowance), you have the full £5,000 starting rate band available. If your non-savings income is £15,000, the starting rate band is reduced to £5,000 - (£15,000 - £12,570) = £2,570. Once your non-savings income reaches £17,570 or more, the starting rate band is fully used up and you only have the Personal Savings Allowance. The starting rate applies before the Personal Savings Allowance — interest covered by the starting rate does not use up your PSA. This makes the starting rate particularly valuable for low-income savers, pensioners with small pensions, and part-time workers. If you are on a low income, you could earn substantial interest without paying any tax at all.

ISA Savings (Always Tax-Free)

Savings held in an Individual Savings Account (ISA) are completely exempt from income tax and capital gains tax, regardless of how much interest or growth you earn. The ISA allowance for 2026/27 is £20,000 per person per tax year. You can hold cash in a Cash ISA earning interest, or invest in shares and funds through a Stocks and Shares ISA. Interest earned inside an ISA does not count towards your Personal Savings Allowance (which means your PSA is available for non-ISA savings). This makes ISAs the most efficient way to shelter savings from tax. Other tax-efficient accounts include Junior ISAs (for children, allowance £9,000 in 2026/27) and Lifetime ISAs (for those under 40, offering a 25% government bonus on up to £4,000 per year). If you are a higher or additional-rate taxpayer, you should maximise your ISA allowance before holding significant savings in taxable accounts. Bear in mind that the PSA and starting rate apply per person, so couples and families can each use their own allowances. See our ISA Guide for a full breakdown of ISA types, transfer rules, and contribution limits.

How to Pay Tax on Savings Interest

If your savings interest exceeds your Personal Savings Allowance and starting rate for savings, you will need to pay tax on the excess. HMRC collects the tax in one of two ways: through your tax code (PAYE) if you are employed or receive a pension; or through your Self Assessment tax return if you already file one or are required to. If you are employed, HMRC will typically adjust your tax code to collect the tax due, reducing your Personal Allowance by the amount of taxable interest. You will see this reflected as a lower tax-free amount on your payslip. If you file a Self Assessment tax return, you report your savings interest on the savings and investments pages, and the tax is included in your overall tax bill. You must register for Self Assessment if your total tax bill on savings interest exceeds amounts that HMRC can collect through your tax code (usually over £3,000). You do not need to contact HMRC if your interest stays within your PSA — banks and building societies do not report interest within the allowance. However, they do report interest above thresholds to HMRC, who may contact you. Keep a record of your interest statements from all accounts to ensure you report accurately. For complex situations, consult a tax adviser.

Savings Interest if You're on a Low Income

If your total taxable income (excluding savings interest) is below your Personal Allowance of £12,570 (2026/27), you may be able to earn savings interest completely tax-free. You can use the starting rate for savings (up to £5,000) on top of your Personal Allowance, and then the Personal Savings Allowance (up to £1,000) if applicable. For example, if your pension or part-time wages are £10,000: you have £2,570 of unused Personal Allowance; the starting rate band is reduced to £5,000 - £2,570 = £2,430; your PSA of £1,000 also applies. So you could earn up to £2,430 + £1,000 = £3,430 in interest tax-free. If you receive Universal Credit or other means-tested benefits, interest on savings may also affect your benefit entitlement. Savings over £6,000 reduce UC, and savings over £16,000 disqualify you entirely. Even if your interest is tax-free, you must still declare your savings capital to the DWP. If your only income is savings interest, you may still need to register for Self Assessment if the interest exceeds your allowances.

Savings for Children and Tax Rules

Children in the UK have the same Personal Savings Allowance and starting rate for savings as adults — but since most children have no other income, they can typically earn interest tax-free. Parents often save on behalf of their children through Junior ISAs (JISAs) or savings accounts. If you open a savings account in your child's name, the interest is treated as the child's income. However, if the money was gifted by a parent, the parental settlement rule applies: if the interest on parental gifts exceeds £100 per parent per tax year, the excess is taxed as the parent's income. For example, if you deposit £5,000 in your child's savings account and it earns £150 interest, the first £100 is tax-free (child's allowance), but the remaining £50 is treated as your income. This rule does not apply to money from grandparents, other relatives, or to Junior ISAs (JISA interest is always tax-free). To avoid the £100 rule, consider using a Junior ISA where interest is completely tax-free regardless of the source of funds. Children aged 16 or over can manage their own adult cash ISA (subject to the £20,000 annual limit) alongside their JISA.

FAQs

Do I need to tell HMRC about my savings interest?

Not if your total taxable interest stays within your Personal Savings Allowance and starting rate for savings. If it exceeds your allowances, you must report it — HMRC will typically adjust your tax code or ask you to file a Self Assessment.

Does savings interest affect my tax code?

Yes. If HMRC knows you have taxable interest (from bank reporting or your Self Assessment), they may reduce your Personal Allowance in your tax code to collect the extra tax through PAYE.

Are premium bond winnings taxed?

No. Premium bond prizes are completely tax-free and do not count towards your Personal Savings Allowance or any other income tax threshold. They also do not affect your tax code.

Can I use my spouse's savings allowance?

No. The Personal Savings Allowance and starting rate are per person. However, couples can transfer savings between accounts to make use of both allowances — this is known as the "aggregation" principle for married couples and civil partners.

What if my savings interest pushes me into a higher tax band?

If your savings interest takes your total income above the higher-rate threshold (£50,270), your PSA drops from £1,000 to £500 for that year. Plan your savings to avoid this threshold if possible, or use ISAs to keep interest tax-free.