Do you pay tax on savings interest?
Interest earned on savings accounts, most fixed-rate bonds and some other cash products counts as income for tax purposes. However, most people pay no tax on it at all because of the Personal Savings Allowance (PSA), a tax-free band that sits alongside your normal Personal Allowance and applies specifically to savings interest.
The Personal Savings Allowance by tax band
How much tax-free interest you can earn each year depends on which income tax band you are in overall, not just on your savings income.
| Taxpayer type | Tax-free savings interest allowance |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
Interest above your allowance is taxed at your marginal rate of income tax — 20%, 40% or 45% for most taxpayers in England, Wales and Northern Ireland (Scotland has its own bands for non-savings income, though savings and dividend rates are set at UK level). If you are an additional-rate taxpayer, all of your savings interest is potentially taxable, since the allowance for that band is nil.
The starting rate for savings
There is a separate, less well-known band called the starting rate for savings, aimed at people with relatively low earnings. If your other income (wages, pension, self-employment profits, etc.) is low enough, you may be able to earn up to £5,000 of savings interest taxed at 0%, on top of your Personal Allowance. This band shrinks by £1 for every £1 your other income exceeds the Personal Allowance, so it disappears entirely once your non-savings income reaches a certain level. It is worth checking HMRC's current figures if this might apply to you, for example if you are retired with a modest pension and some savings.
How HMRC finds out about your interest
Since 2017, banks and building societies have been required to report interest paid to customers directly to HMRC each year, without you needing to declare it separately in most cases. HMRC uses this data, combined with your tax record, to work out whether you owe any tax on interest above your allowance. If you do, and you are employed or receive a pension, HMRC will typically collect the tax by adjusting your PAYE tax code for a future year, rather than asking you to complete a tax return. If you already complete Self Assessment for other reasons, you declare interest income there instead, and HMRC's figures can act as a useful cross-check.
When you might need to take action
You may need to contact HMRC or complete a Self Assessment return if: you are newly liable to higher-rate or additional-rate tax and have significant savings interest; you have a large lump sum in a fixed-term bond maturing in one go, which could push you over your allowance in that particular year; or you disagree with a tax code adjustment HMRC has made based on interest data. Keeping an eye on your annual tax code notice, and your interest across all accounts, is sensible even though the system is largely automatic.
Why cash ISAs still matter
With a £1,000 or £500 tax-free allowance, many basic-rate taxpayers with modest savings will never pay tax on interest even in an ordinary savings account. But as interest rates rise or savings balances grow, larger deposits — especially for higher-rate and additional-rate taxpayers — can easily generate more interest than the allowance covers. Cash ISAs remain valuable here because interest earned inside one is always tax-free and does not use up your PSA at all, regardless of how much you hold or what tax band you are in. For anyone with substantial cash savings, particularly higher earners, prioritising the cash ISA allowance each year can meaningfully reduce or eliminate a savings tax bill over time.
Bringing it together
A useful way to think about it: work out your likely total income for the year, identify which tax band that places you in, and check your PSA against your expected interest from all non-ISA savings and fixed-rate bonds. If you are close to or over your allowance, consider whether shifting some savings into a cash ISA, spreading large maturing bonds across tax years, or (for couples) redistributing savings towards the lower-earning partner could reduce the overall tax bill.
Key takeaways
- The Personal Savings Allowance is £1,000 for basic-rate taxpayers, £500 for higher-rate, and £0 for additional-rate taxpayers.
- Interest above your allowance is taxed at your normal marginal income tax rate.
- A separate starting rate for savings can give low earners up to £5,000 of tax-free interest, tapering away as other income rises.
- Banks report interest to HMRC automatically, and any tax owed is usually collected via a PAYE tax code change rather than a tax return.
- Large lump sums maturing in one tax year can unexpectedly breach your allowance — consider spreading maturity dates.
- Cash ISAs remain useful, particularly for higher earners and larger savings balances, since ISA interest is always tax-free.