How is savings interest taxed in the UK?
Most people pay no tax on savings interest, but not everyone. Here is how the allowances work, with examples.
The short answer
Interest on savings is taxed as income, but you can earn some of it tax-free. Interest in an ISA is always tax-free. Banks and building societies pay interest without deducting tax, so if you owe tax it is collected through your tax code or Self Assessment.
The Personal Savings Allowance
| Your income tax band | Allowance |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
Interest above your allowance is taxed at your income tax rate. See GOV.UK: How much is tax-free.
The starting rate for savings
If your other taxable income is under £17,570, you may be able to earn up to £5,000 of interest tax-free on top of the allowance above. Every £1 of other income above your Personal Allowance reduces it by £1, so it mainly helps people on low earnings, students and retirees.
Worked examples
Say you hold £20,000 at 4.5%, which earns £900 a year:
- Basic-rate taxpayer: £900 is under the £1,000 allowance, so there is no tax.
- Higher-rate taxpayer: £900 is £400 over the £500 allowance. Tax at 40% is £160.
- Additional-rate taxpayer: there is no allowance, so tax at 45% on £900 is £405.
With £30,000 at 4.5%, interest is £1,350. A basic-rate taxpayer pays 20% on the £350 over the allowance, which is £70.
ISAs
Interest, dividends and gains in an ISA are tax-free and do not count towards your savings allowance. You can put up to £20,000 a year into ISAs in total. See GOV.UK: Individual Savings Accounts.
Changes from April 2027
From 6 April 2027, income tax rates on savings interest rise by 2 percentage points, to 22% for basic-rate, 42% for higher-rate and 47% for additional-rate taxpayers. The cash ISA limit is also set to fall to £12,000 a year for people under 65, while the overall £20,000 ISA allowance stays. These changes were announced but may be updated, so check GOV.UK before you act on them.
Where to learn more
This guide is for information only and is not tax or financial advice.