How much tax will I need to pay on my savings interest?

Question: In 2024/25, I was employed until summer 2024 and paid higher-rate tax. Since then, I’ve not been working, instead living off my savings. I exceeded the £500 Personal Savings Allowance (PSA) last year, but now I’m unsure what my PSA is this year. I’m in my late 30s with no other income apart from savings (easy-access accounts, NS&I Income Bonds, Premium Bonds, and annual interest from fixed-rate accounts). I also have ISAs but haven’t withdrawn from them. I am worried that HMRC will send me a huge tax bill? How does HMRC know how much interest I’ve earned?

"I am confused about how much tax 

I will need to pay on my savings interest."

It's great that you’re thinking ahead and keeping an eye on your tax position – it can feel a bit confusing, especially if your income changes during the year. While I’m not a tax adviser and can’t give personal tax advice, I can definitely help clarify some of the key points you’ve raised. If you want complete certainty for your situation, speaking directly with HMRC or a qualified accountant is always a good idea.

Understanding the Personal Savings Allowance (PSA) 

The amount of savings interest you can earn tax-free each year – your PSA – depends on your overall taxable income for the tax year (from 6 April to the following 5 April). It’s different depending on the level of tax you pay in each individual year.

• For basic rate taxpayers, your PSA is £1,000 of tax-free savings interest.
• For higher rate taxpayers (40%), it’s £500
• But, if you are an additional-rate (45%) taxpayer, you do not have a PSA at all.

You mentioned that you were employed until the summer of 2024. If the income from your savings and your salary took you into the higher rate tax bracket in 2024/25 then your PSA was £500, regardless of whether you were only employed for part of the year. The PSA is based on your marginal rate over the course of the tax year.  

Looking at the current tax year (2025/26) – if your only income now is from savings, and it stays below the higher-rate threshold, you may be classed as a basic-rate taxpayer, giving you a larger PSA of £1,000. But this depends on your total income for the year – if circumstances change and your income increases before the end of this tax year, your PSA could reduce again.

One thing to note is that not all of your savings interest is necessarily taxable. NS&I Premium Bond prizes, and any interest earned on ISAs are tax-free and don’t count towards your taxable income or Personal Savings Allowance. However, interest from NS&I Income Bonds, easy-access accounts, and fixed-rate bonds is taxable and does count.

Some additional good news, although it comes with additional complications for your calculations, is that if your income is all provided from your cash savings, you should be eligible for an extra tax-free allowance called the ‘starting rate for savings’.  

Your allowances for earning interest before you have to pay tax on it include your:

• Personal Allowance (currently £12,570) – this is applied first
• Starting Rate for savings (up to £5,000) which applies after the Personal Allowance if your income from wages and pensions (not savings interest) is less than £17,570
• On top of that, you also get a Personal Savings Allowance (either £1,000 or £500)

You get these allowances each tax year (6 April to 5 April). How much you get depends on your income and where it comes from.

So, potentially, you could earn up to £18,570 of savings interest tax-free in a year if you have no other income – a generous allowance.

There’s more information here on how these allowances work together.

Will HMRC send you a tax bill?

Possibly, but only if tax is due. Banks, building societies and NS&I report your taxable interest directly to HMRC each year.  

If you are in employment or receiving a pension, and therefore part of the PAYE scheme, any tax due, if you have exceeded the PSA, will usually be collected via a change to your tax code in the following tax year.

But if you are not employed, you may need to fill in a Self-Assessment return and pay the tax due.

What’s important to remember is that it is your responsibility to make sure that you pay any tax due if your interest does exceed your PSA, so keep track of how much interest you are earning, whether you physically take it from your savings accounts or allow it to compound back into the account. But do reach out to HMRC or an adviser if you need to double check your own circumstances – it’s always best to be sure.

Finally, if you continue to rely on savings for income, it’s well worth making the most of your ISAs, where interest and investment growth are always tax-free.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate cash or tax advice