How much tax do you pay on your savings?

In the UK, the interest you earn on savings can count as taxable income once it reaches a certain threshold.  

The amount you can earn before you reach this threshold is known as the ‘Personal Savings Allowance’. This is the amount of savings interest you can earn before tax is applied, depending on your Income Tax band.  

It is different from your HMRC ‘Personal Allowance’, which is the amount of income you can earn each tax year before paying Income Tax. The two are often confused, but they do different jobs. Your Personal Allowance covers income more broadly, while your Personal Savings Allowance is specifically about interest earned on cash savings. 

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The basics about savings and tax

Contrary to what many people assume, savings are not always tax free. In the UK, the interest you earn on your savings can be taxable, depending on how much you receive and your Income Tax band. Many savers will not pay any tax, but it is still important to understand the limits.

The good news is that the rules are a bit more generous than many people realise. Before savings interest is taxed, several allowances may come into play. Your Personal Allowance can help, there is a starting rate for savings in some cases, and most savers also have a Personal Savings Allowance. Together, these can mean you earn some interest without paying any tax. And everyone can also take advantage of the Individual Savings Account (ISA) where any returns are free of any tax.

What types of savings interest are taxed?

The main type of savings income people think about is interest from bank and building society accounts, and that certainly can be taxed. But savings income is wider than that. It can also include interest from some credit union accounts and certain other savings products that pay interest outside a tax sheltered wrapper. In practice, if a product pays you interest and it is not a tax efficient account such as an ISA, there is a good chance it needs to be considered.  

By contrast, interest earned inside an ISA does not count as taxable savings income. That is one of the reasons ISAs remain so useful, especially for higher earners or for people with larger cash balances who may go over their allowance elsewhere.

The tax treatment of children’s savings can also be different in some cases, especially where money has been given by a parent, so that is another area where it pays to be careful.  

What is a Personal Savings Allowance?

The Personal Savings Allowance is the amount of savings interest you can receive each tax year before tax becomes due. It is linked to your Income Tax band rather than being the same for everyone. Basic rate taxpayers can earn up to £1,000 in savings interest tax free. Higher rate taxpayers have an allowance of £500. Additional rate taxpayers do not get any Personal Savings Allowance.  

This allowance has become especially important in recent years because higher savings rates have pushed more people above it. Someone with a modest savings balance in cash may never notice the rules. Someone with a larger emergency fund or house deposit can cross the line much more quickly once interest rates start to rise. That does not mean saving is a mistake, but it does mean the tax position is worth checking.  

How your personal savings allowance works

Your allowance is based on your highest rate of Income Tax. To work that out, HMRC looks at your other income and your savings interest together. That means your tax band is not judged in isolation from your savings. If your earnings already put you in the higher rate band, your Personal Savings Allowance is £500. If your income places you in the additional rate band, it will be nil.  

There is also a starting rate for savings, which can help people on lower incomes. If your non savings income is low enough, you may be able to earn up to £5,000 in savings interest at a 0% starting rate. This is separate from the Personal Savings Allowance and can sit alongside it. In the right circumstances, that means someone with a lower income may be able to receive more interest before any tax is due.  

What your Personal Savings Allowance includes

Your Personal Savings Allowance applies to savings income such as bank and building society interest. In simple terms, it covers the interest you receive from taxable savings accounts. HMRC says you should add the interest you have received to your other income when working out your tax position, which shows that the allowance is about savings income.

What does not need to be included is interest from tax free wrappers such as ISAs, because that interest is already outside of the tax net. It also does not mean all investment returns are treated the same way. Dividends, for example, have their own separate rules, and gains on investments follow different tax rules again. That is why it is important not to lump all savings and investments together as though they are taxed in the same way.  

Exceeding your Personal Savings Allowance

If your savings interest goes above your Personal Savings Allowance, the excess is taxed at your usual rate for savings income. So a basic rate taxpayer would generally pay 20% on the amount above the allowance. A higher rate taxpayer would generally pay 40% on the excess. Additional rate taxpayers will also face a tax charge on all of their taxable savings interest at 45% because they do not receive the allowance.  

It should also be noted that the tax rates on cash savings is increasing by 2% from 6th April 2027. So, a basic rate taxpayer will pay 22%, a higher rate taxpayer will pay 42% and an additional rate taxpayer will pay 47% on any taxable interest.

The Personal Savings Allowance can be used up more easily than people expect. As mentioned earlier, a large cash balance held for security can produce a sizeable amount of interest when rates are decent.  

As an example. If your savings account is paying you 4.0%, you only need a balance of £25,000 to use up the whole of your basic rate allowance of £1,000 in a year. Everything above that £1,000 will be taxed.

In some cases, savers who have never had to think about tax on their interest before may suddenly need to. That is often the point where a review of account structure, ISA use, and wider financial planning becomes worthwhile.  

Paying tax on savings interest

Banks and building societies pay interest gross, which means without deducting tax first. If tax is due, HMRC will usually collect it later. For many employees and pensioners, that is done by changing the tax code so the right amount is collected through PAYE. If you complete a Self Assessment tax return, savings interest is usually dealt with there instead.  

That system can feel easy when it works properly, but it still leaves room for mistakes. If HMRC does not have the right information, or if your circumstances change during the year, the amount collected may not be exactly right. That is one reason it is sensible to keep an eye on how much interest your accounts are generating rather than assuming everything has been sorted automatically.  

It is worth noting that most banks and building societies tell HMRC how much interest they have paid to their customers, so trying to ‘hide’ from HMRC is not advisable.

How to pay tax on savings and investments

As mentioned above, if you already file a Self Assessment return, you normally declare your taxable savings interest there. If you do not complete Self Assessment, HMRC may adjust your tax code to collect what is owed. Where tax has been deducted and should not have been, you may be able to reclaim it, including through form R40 in the appropriate cases.  

The key point is that savings and investments should not be looked at in isolation. Cash interest, ISA allowances, dividend income, and other taxable returns all interact with your wider financial picture. A decision that looks sensible on one account can become less efficient when you step back and look at your full position. Good planning is often less about chasing the highest headline rate and more about keeping more of what you earn after tax. 

Speak to an expert to protect your savings

Tax on savings is not always complicated, but it is easy to misunderstand. A lot depends on your income, your tax band, and where your money is held. What seems like a small detail can make a real difference once balances grow or interest rates improve. And don’t forget, using any unused allowance your spouse has can help minimise your tax bill when working as a couple.  

Speaking to an expert can help you understand whether you are likely to pay tax, whether your cash is in the right place, and whether you could make better use of wrappers such as ISAs. The aim is not to make saving feel difficult. It is to help you keep your plans efficient, avoid unpleasant surprises, and make sure more of your money keeps working for you. 

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The Financial Conduct Authority (FCA) does not regulate cash flow planning or tax.

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