How Are My Savings Taxed? Full UK Guide

Home Savings Accounts Guides How are my savings taxed

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At a glance

The Personal Savings Allowance enables basic- and higher-rate taxpayers to earn £1,000 and £500 respectively in interest on their savings each year without needing to pay Income Tax
If you’re employed or receive a pension, HMRC will usually collect any tax owed for exceeding your Personal Savings Allowance by automatically adjusting your tax code
Those concerned about exceeding their Personal Savings Allowance could consider other tax-efficient savings options, such as an ISA, pension or Premium Bonds.

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What is the Personal Savings Allowance?

The Personal Savings Allowance (PSA) is the maximum amount of interest you can earn from your savings each year before being taxed.

It was introduced in 2016 as a way to encourage and reward savers (who previously had to pay tax on all interest they earned) but has come under scrutiny in more recent years for failing to evolve with the rapidly changing economic landscape.

Our comprehensive guide explains what you need to know about your Personal Savings Allowance, how HMRC goes about collecting tax owed on savings and offers some tax-free saving alternatives.

Do I need to pay tax on savings?

Before getting started, it’s important to understand you’ll only be taxed on the interest earned from your savings – not your savings pot itself.

Even then, you’ll only need to pay tax if the amount of interest you receive exceeds your Personal Savings Allowance.

How much interest can you earn from savings without paying tax?

The amount of interest you can earn on your savings before needing to pay tax depends on how much you take home from your salary, pension and/or other revenue streams, as the Personal Savings Allowance is staggered based on Income Tax bands.

Income Tax Band	Taxable Income	Tax Rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional Rate	Over £125,140	45%

^{Note: Income Tax bands and rates differ if you live in Scotland, and is paid to the Scottish Government. For more information, visit the Government website.}

Income Tax Band	Personal Savings Allowance
Basic-rate taxpayers	£1,000
Higher-rate taxpayers	£500
Additional-rate taxpayers	£0

As the table above shows, basic and higher-rate taxpayers can earn up to £1,000 and £500 each tax-year, respectively, while additional-rate taxpayers don’t qualify for any tax-free savings allowance at all.

However, these thresholds haven’t been updated since the Personal Savings Allowance launched nine years ago, despite savings accounts paying higher interest rates and more people being dragged into a higher tax bracket as a result of wage inflation and frozen Income Tax bands.

Does the Personal Allowance apply to savings?

The Personal Savings Allowance shouldn’t be confused with the Personal Allowance; the latter is the portion of your income you don’t need to pay tax on. For many, this threshold stands at £12,570 for the 2025/26 tax-year.

But, if you take home less than £12,570 a year from a job or pension, the remainder of your Personal Allowance can be used to earn tax-free interest on your savings.

What is the starting rate for saving?

If your annual income is less than £17,570, you’ll also qualify for the starting rate for savings. This enables low earners to receive up to £5,000 in interest without needing to pay tax.

While those earning £12,570 or less are entitled to the full amount, the starting rate for savings decreases by £1 for every £1 of income above the Personal Allowance. For instance, if your yearly income amounts to £13,570 (£1,000 more than the Personal Allowance), you can earn a maximum of £4,000 in tax-free interest under the starting rate for savings (£5,000 less £1,000).

More examples:

Emma receives £10,000 in wages each year, plus £5,000 from interest on savings. She wouldn’t pay any Income Tax on her salary as it falls below the £12,570 Personal Allowance; this also means she’d qualify for the full £5,000 starting rate for savings and therefore wouldn’t be taxed on the interest accrued by her savings.

Tony takes home £14,000 a year from his job and earns £3,000 interest on his savings. He’d be liable for Income Tax on the £1,430 of his salary that sits above the Personal Allowance and would also have his starting rate for savings reduced by the same amount. But, at £3,570, his starting rate is still enough to accommodate the interest earned from his savings and it therefore wouldn’t be taxed.

Adele earns £17,000 a year from her employment, as well as £1,000 interest on her savings. She’d need to pay Income Tax on the £4,430 that exceeds the Personal Allowance. But, while her starting rate for savings would reduce to £570, the remaining £430 interest would be covered by her Personal Savings Allowance.

For personalised help, consider speaking with a financial adviser; our preferred financial planner is Kellands Hale.

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What accounts are included in the Personal Savings Allowance?

The Personal Savings Allowance not only covers returns on savings accounts (including easy access, notice, fixed and regular savings accounts), but also applies to interest earned from other sources, such as:

Any accounts held with banks, building societies and credit unions (including current accounts)
Unit trusts, investment trusts and open-ended investment companies
Government and company bonds
Peer-to-peer lending
Trust funds
Payment protection insurance (PPI)
Life annuity payments
Some life insurance contracts

What happens if you exceed your Personal Savings Allowance?

If you receive enough interest to breach your Personal Savings Allowance, you’ll be taxed on the amount above the allowance at your usual rate of Income Tax.

This is becoming a very real possibility for many savers. Between 2022/23 and 2028/29, almost four million more people are expected to pay Income Tax as a result of fiscal drag, according to the Office for Budget Responsibility (OBR). It also estimates three million more will become higher-rate taxpayers, with 400,000 more moving to the additional-rate tax band.

Those affected will not only have to pay Income Tax at a higher rate, but their Personal Savings Allowance will also be slashed. And, with returns on savings much higher than nine years ago, some with smaller balances may be at risk of exceeding their allowance for the first time.

Tax-free saving alternatives

Individual Savings Accounts (ISAs): Savers can deposit a combined total of up to £20,000 in ISAs each tax-year without worrying about paying Capital Gains or Income Tax on any returns. There is a wide range of ISAs available to suit a variety of savings goals, including easy access and fixed rate cash ISAs, stocks and shares ISAs and Lifetime ISAs (LISAs).

Find out how these differ from traditional savings accounts with our guide: Cash ISA or Savings Account: Which should I choose? Alternatively, compare the best ISA rates by visiting our dedicated chart or reading our weekly ISA roundup.

Pension: Payments into a pension will also grow free from Capital Gains and Income Tax; what’s more, you’ll be eligible for tax-relief on contributions equal to up to 100% of your annual salary (to a maximum of £60,000). But bear in mind you can’t withdraw from your pension until you reach the Normal Minimum Pension Age (currently 55, this will rise to 57 as of 2028) and you’ll still be liable for Income Tax when accessing most of your pot.

Struggling to decide between paying into your pension and contributing to an ISA? Read our pension vs ISA guide.

Premium Bonds: In contrast to other savings products, Premium Bonds from the Government-backed brand, National Savings & Investments (NS&I), offer the chance to win tax-free cash prizes instead of paying interest. Learn more about Premium Bonds.

How is tax on savings collected?

How HMRC goes about collecting tax owed for exceeding your Personal Savings Allowance depends on your employment status.

If you are employed or receive a pension, HMRC will adjust your tax code so the tax is paid automatically; this is done by estimating the amount of interest you earned based on returns from previous tax-years.

Once the current tax-year ends on 5 April, you may receive a Tax Calculation letter (P800) between June and March the following year if you’ve over- or underpaid.

Moneyfacts tip Image of Ella Mower

If you don’t receive a Tax Calculation letter within this timeframe but believe you’ve overpaid tax, you can find out how to claim a refund using the Government website; alternatively, get in touch with HMRC if you think you’ve underpaid and not been contacted to avoid incurring a tax penalty.

How long does it take HMRC to change your tax code?

HMRC usually updates your tax code automatically following a change in your income, so it’s important to keep your employment details up to date. Incorrect or out of date information can result in the wrong tax code being applied.

In some cases, you may be put on an emergency tax code which can take up to 35 days to amend after either you or your employer supply the correct details to HMRC.

How can I check if HMRC has updated my tax code?

You can check your tax code using the Government website or by downloading the HMRC app. Note, you may be asked to prove your identity using photo ID, such as a passport or driving licence.

Do I need to register for self-assessment if I owe tax on interest?

Meanwhile, you’ll need to complete a Self Assessment tax return if you’re self-employed or your income from savings and investments is over £10,000 a year. If you’re still unsure, you can use the Government website to find out whether you need to submit a tax return.

Does HMRC know if I’m not declaring interest on savings?

You can’t conceal how much interest you earn from your savings, as your bank or building society will inform HMRC of the total amount accrued at the end of each tax-year. This is also how HMRC determines how much tax you need to pay if you’re not employed, don’t receive a pension and aren’t required to complete a tax return.

Do I have to tell HMRC about the interest earned from savings?

To summarise, only those who are self-employed and/or earn interest of more than £10,000 a year from savings and investments need to inform HMRC directly by completing a tax return.

However, you may still contact HMRC if you feel you’ve over- or underpaid tax on your savings; keep in mind you can only reclaim an overpayment within four years of the relevant tax-year ending.

How are savings taxed FAQs

What happens I don’t declare interest from savings to HMRC?

Unless you’re among those who need to complete a tax return (i.e. self-employed or earn £10,000 or more from savings and investments each year), you don’t need to declare interest from your savings to HMRC.

But, if you’re required to fill out a tax return and fail to declare, or provide false information, you may face a tax penalty and/or be prosecuted.

What is the tax-free savings allowance for joint accounts?

There isn’t a tax-free savings allowance specifically for joint accounts. Instead, any interest earned is divided equally between both accountholders and contributes towards both of their respective Personal Savings Allowances – regardless of how much they each contributed to the account.

What tax is payable on a fixed bond?

HMRC states tax is only payable “when [interest] is received or made available to the recipient”. As such, how much tax and when it needs to be paid varies from one fixed bond to another depending on the length of term.

This is complicated further by whether interest is paid as income or reinvested into the account; interest taken as income, for instance, will count towards your Personal Savings Allowance as soon as it’s paid out.

Meanwhile, if you can’t access the interest in your account until the term ends, HMRC views this as receiving interest on maturity (even if it’s compounded monthly or yearly). This could increase you tax liability in the year in which your fixed bond matures and could mean you exceed your Personal Savings Allowance.

To find out when an account pays interest, click 'view further details' next to any of the listings on our fixed rate bond chart.

Do I need to pay tax on returns on my investments?

You may be liable for Capital Gains Tax (CGT) when selling shares depending on the type of investments you hold and where; the Government website provides more information on this.

However, you don’t need to pay tax on any income from interest dividends that comes under by your Personal Allowance. You also receive a yearly share dividend allowance which stands at £500 for the 2024/25 tax-year. As with the Personal Savings Allowance, you only pay tax on income from share dividends that exceeds this allowance.

To avoid paying Capital Gains Tax on your investments, you could consider a stocks and shares ISA.

Do I need to pay tax on interest earned from business savings accounts?

Yes, you need to pay tax on interest earned from a business savings account, as the Personal Savings Allowance only applies to individuals.

Returns on business savings are paid gross (meaning tax isn’t deducted at source) and you must therefore declare any interest earned as part of your yearly tax return.

Is it too late to contact HMRC if I’ve made a mistake when declaring the interest earned from my savings?

You should look to correct any errors on your tax return as soon as possible; you can typically make changes to your tax return (online or by submitting another paper form) with 12 months of the Self Assessment deadline.

However, you’ll need to write to HMRC if looking to amend a return from an earlier tax-year or you’ve missed the deadline.

I’m unsure whether I need to pay tax on my savings – should I contact HMRC?

Don’t hesitate to contact HMRC if you have any questions about whether you need to pay tax on your savings.

You could also consider enlisting a financial adviser to help with tax-planning. Our preferred financial adviser is Kellands Hale.

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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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