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Savings Interest Tax

Interest earned on savings accounts is subject to Income Tax in the UK, but the tax system provides two important reliefs: the Personal Savings Allowance (PSA) and the Starting Rate for Savings. Understanding how these work together is essential for anyone with cash savings outside an ISA. The tax year runs from 6 April to 5 April, and interest is taxed in the year it is received (or credited to your account).

Personal Savings Allowance

The Personal Savings Allowance lets basic-rate taxpayers earn up to £1,000 of savings interest tax-free each year. Higher-rate taxpayers have a £500 allowance, and additional-rate taxpayers (those with income over £125,140) have no PSA — all of their savings interest is taxable. The PSA applies to interest from bank accounts, building societies, peer-to-peer lending, savings bonds, and credit union accounts. Interest within an ISA does not count towards the PSA because it is already tax-free. The allowance is per individual, so a couple who are basic-rate taxpayers can earn £2,000 of interest tax-free between them.

Starting Rate for Savings

The Starting Rate for Savings provides an additional band of up to £5,000 of savings interest taxed at 0%. However, this rate is reduced for every £1 of non-savings income (employment, pension, rental income) you earn above the personal allowance (£12,570). The formula is: starting rate band = £5,000 minus (non-savings income minus £12,570). If your non-savings income exceeds £17,570, your starting rate band is reduced to zero. For example, if you earn £14,000 in employment income, your non-savings income above the personal allowance is £1,430, so your starting rate band is £5,000 − £1,430 = £3,570. Interest within this band would be taxed at 0%.

How Banks Report Interest

Banks and building societies in the UK report interest earned to HMRC automatically through the Real Time Information (RTI) system. Since April 2024, HMRC can collect savings tax directly through adjustments to your tax code under the "interest in real time" programme. If you are employed or receive a pension, HMRC may adjust your tax code to collect the tax due on savings interest, rather than requiring you to file a Self Assessment return. If your interest exceeds £10,000 in a tax year, HMRC will normally expect you to file a Self Assessment return regardless. You can check whether HMRC has adjusted your tax code through your Personal Tax Account on GOV.UK.

Interest from UK Accounts

Interest from UK banks and building societies is paid gross — no tax is deducted at source. This differs from the old system (before April 2020) when banks deducted 20% tax before paying interest. Now, you are responsible for reporting the interest and paying any tax due. Most banks provide an annual statement showing the total interest paid in the tax year, and this information is also available through your online banking. If you have multiple accounts, you need to total the interest from all of them to determine whether it exceeds your PSA.

Interest from Foreign Accounts

If you hold bank accounts outside the UK, the interest is still taxable in the UK if you are UK-resident. Many countries impose withholding tax on interest paid to non-residents. The UK generally has double taxation treaties that allow you to claim Foreign Tax Credit Relief for withholding tax suffered abroad. You report the gross interest on your Self Assessment return and claim the credit separately. Exchange rates used should be HMRC's published spot rates for the relevant period. Non-UK accounts must also be reported to HMRC under the "Requirement to Correct" rules if they hold more than £1,000 in value, and may need to be disclosed under the Worldwide Disclosure Facility.

Interest Tax Planning

With interest rates having risen significantly from historic lows, savings tax has become a real concern for many people. The simplest way to avoid tax on savings interest is to use your Cash ISA allowance (£20,000). For couples, splitting savings between partners takes advantage of two PSAs and two starting rate bands. If you are a non-taxpayer (income below the personal allowance), you can register to have interest paid without tax via HMRC Form R40. Premium Bonds offer a tax-free alternative to savings accounts, though the returns are variable and based on a prize draw rather than guaranteed interest.

Joint Accounts

Interest on joint accounts is normally split 50:50 between the account holders for tax purposes, regardless of who contributed the funds. If the beneficial ownership is different from the legal ownership, you can elect to have the interest split in proportion to actual contributions by notifying HMRC. Each account holder's share is assessed against their own PSA and starting rate band. This makes joint accounts a useful tool for couples where one partner has little or no other income, as they can use their personal allowance and starting rate band to shelter more interest from tax.