Savings Interest and Tax UK 2025/26: Personal Savings Allowance, Starting Rate and How to Keep More of Your Interest

In the UK, interest earned on savings counts as taxable income. It sits on top of your employment income, pension income and any other earnings when calculating your total tax bill for the year. The tax year runs from 6 April to 5 April — so the 2025/26 tax year covers 6 April 2025 to 5 April 2026.

The rate of tax you pay on savings interest depends on your Income Tax band. For England, Wales and Northern Ireland in 2025/26, the bands are:

• Basic rate (20%): Taxable income up to £37,700 above your Personal Allowance
• Higher rate (40%): Taxable income from £37,701 to £125,140 above your Personal Allowance
• Additional rate (45%): Taxable income above £125,140

However, before you worry about paying 20% or 40% on your interest, the UK tax system provides two important allowances that mean most people pay nothing at all.

Introduced in April 2016, the Personal Savings Allowance (gov.uk/apply-tax-free — see GOV.UK for current allowances (gov.uk/income-tax-rates)-interest-on-savings) (PSA) lets you earn a set amount of savings interest each tax year completely free of Income Tax. The amount depends on your tax band:

• Basic rate taxpaye system managed by HMRC (gov.uk/tax-codes)rs: £1,000 of tax-free interest per year
• Higher rate taxpayers: £500 of tax-free interest per year
• Additional rate taxpayers: £0 — no Personal Savings Allowance

To put this in perspective, a basic rate taxpayer with savings in an easy access account paying 3.5% could hold roughly £28,500 before their interest exceeded the £1,000 PSA. A higher rate taxpayer with the same account would breach their £500 allowance at around £14,300.

The PSA covers interest from bank and building society accounts, credit union accounts, peer-to-peer lending, government and corporate bonds, and certain life insurance contracts. It does not cover interest earned inside ISAs or from NS&I tax-free products — those are already tax-free (gov.uk/individual-savings-accounts) and do not count toward your PSA.

Importantly, your tax band is determined by adding your savings interest to your other income. If your savings interest itself pushes you from the basic rate into the higher rate band, the portion above the threshold is taxed at the higher rate and your PSA drops to £500 for that portion. For a practical example of how this affects fixed rate savings bonds, where all interest may be taxable in a single year at maturity, see our dedicated guide.

On top of the PSA, the UK tax system offers another allowance that many people miss entirely: the starting rate for savings. This allows up to £5,000 of savings interest to be taxed at 0%, but it is only available to people with relatively low non-savings income.

Here is how it works. Every £1 of non-savings income you earn above the £12,570 Personal Allowance reduces your starting rate for savings by £1. If your non-savings income (wages, pension, rental income) exceeds £17,570 — that is, £12,570 plus £5,000 — you get no starting rate at all.

For someone earning £14,000 from employment, the calculation would be:

1. Personal Allowance uses up £12,570 of wages
2. Remaining wages: £14,000 − £12,570 = £1,430
3. Starting rate for savings reduced by £1,430: £5,000 − £1,430 = £3,570
4. Combined with the £1,000 PSA, this person could earn £4,570 in interest tax-free

This makes the starting rate for savings particularly valuable for retirees living on a modest pension, part-time workers, and anyone whose main income falls below the £17,570 threshold. For a pensioner receiving £15,000 a year from the State Pension, the starting rate for savings would be £2,570 on top of their £1,000 PSA — sheltering £3,570 of interest from tax.

Since April 2016, banks and building societies have paid interest gross — without deducting any tax. This means you receive the full amount of interest into your account. But that does not mean the tax has gone away.

Your bank or building society reports your interest to HMRC automatically at the end of each tax year. HMRC then works out whether you owe any tax based on your total income and allowances. How they collect it depends on your circumstances:

If you are employed or receive a pension: HMRC will adjust your tax code for the following year to collect the tax through PAYE. You will see a reduced tax code, meaning slightly more tax is deducted from each pay packet or pension payment. You may also receive a P800 tax calculation letter between June and March of the following year showing any overpayment or underpayment.

If you complete a Self Assessment tax return: You must declare your savings interest on your return. If your savings and investment income exceeds £10,000, you are required to register for Self Assessment even if you do not normally complete one.

If you are not employed and do not complete Self Assessment: HMRC will write to you explaining how much tax you owe and how to pay it.

One common pitfall: if you exceed your PSA and do not receive a letter from HMRC by 31 March of the following tax year, you must contact them directly. Failing to do so can result in penalties.

If your savings interest is approaching or exceeding your PSA, several strategies can help you keep more of your returns:

Use your ISA allowance first. Interest earned inside a cash ISA is completely tax-free and does not count toward your PSA. In the 2025/26 tax year, you can put up to £20,000 into ISAs. With Cash ISA rates currently around 3% to 4%, this alone can shelter £600 to £800 of annual interest from tax — before your PSA even comes into play.

Split savings between partners. If you have a spouse or civil partner in a lower tax band, consider holding more savings in their name. A non-taxpayer can earn up to £18,570 in interest tax-free (using the full Personal Allowance, starting rate for savings and PSA combined). A basic rate taxpayer gets £1,000 tax-free through the PSA alone.

Consider NS&I tax-free products. Premium Bonds prizes are completely tax-free and do not count toward your PSA. While the current prize rate is 3.30% and the expected return varies, for higher rate and additional rate taxpayers the effective after-tax equivalent can be attractive compared with taxable accounts.

Time your fixed-rate bonds carefully. Interest on fixed-rate savings bonds is typically paid or credited at maturity. If a two-year bond matures and pays all interest in a single tax year, it could push you over your PSA for that year. Some providers offer annual interest payments, which spreads the tax liability more evenly.

Keep records. Although banks report to HMRC, maintaining your own records of interest earned across all accounts helps you spot potential problems early and ensures your tax code is correct.

This article is for informational purposes only and does not constitute regulated financial advice. If you are unsure about your tax position, consult a qualified financial adviser or accountant.

If you are still building your savings, start with an emergency fund — three to six months of essential expenses in an easy access account — before worrying about tax-efficient wrappers.