In this guide
This guide includes changes announced in the 2025 Budget, including changes to ISA allowances and tax rates that apply in future tax years.
How does tax on savings work in the UK?
What counts as taxable savings interest?
Savings tax is the tax you pay on taxable interest earned from accounts such as current accounts, regular savings accounts and fixed-rate bonds. Interest earned in an ISA is tax-free. The rules are set by HMRC and apply to all UK residents.
Do you pay tax on savings interest?
Yes, but you only pay tax if your interest goes over certain limits. Most people can earn an amount of interest tax-free.
What is the personal savings allowance?
Your personal savings allowance (PSA) is the amount of interest you can earn from your savings before you pay any tax. How much you can earn tax-free depends on your income tax band.
How much interest can I earn before paying tax?
- If you pay the basic rate of tax (20%): You can earn up to £1,000 in interest without paying tax
- If you pay the higher rate (40%): Your tax-free interest allowance is £500
- If you pay the additional rate (45%): There’s no tax-free allowance for savings interest. You’ll pay tax on all your savings interest
If your interest goes over your PSA, you’ll pay tax on anything above it at your usual rate. For example, a basic rate taxpayer earning £1,200 would pay tax on the £200 above the allowance.
2025 Budget update: While the PSA amounts remain unchanged by the Budget, a freeze on income tax bands until April 2031 means more people may be affected as their earnings rise.
What is the starting rate for savings?
If your total income (not including savings interest) is less than £17,570, you may also get the starting rate for savings, which lets you earn up to £5,000 in interest tax-free. This is on top of your personal savings allowance. But the more you earn from other sources, the lower the starting rate you get.
How much tax do you pay on savings interest over the allowance?
If you go over your tax-free interest allowance, you pay tax at your usual rate:
- Basic rate (20%): 20p tax for every £1 over your allowance
- Higher rate (40%): 40p tax for every £1 over your allowance
- Additional rate (45%): 45p tax for every £1 over your allowance
For example, if you’re a higher rate taxpayer and earn £700 in interest:
- £500 is tax-free (your PSA)
- £200 is taxed at 40% (£80 tax)
2025 Budget update: From April 2027, the tax rates on savings interest will increase by 2 percentage points. You’ll pay 22% (basic rate), 42% (higher rate), or 47% (additional rate) on interest above your allowance.
How does HMRC work out tax on savings?
Is bank interest taxed at source?
No. Since 2016, banks and building societies pay all interest gross (without tax taken off). It’s up to you to check if you owe tax and pay it if you go over your allowance.
How do I pay tax on savings interest?
- If you’re employed or get a pension, HMRC usually collects any tax you owe through your tax code (PAYE)
- If you’re self-employed or have lots of savings, you may need to fill in a self-assessment tax return
- HMRC will write to you if they think you owe tax on your savings
Do I need to declare interest on savings?
If you complete a self-assessment tax return, you must report your savings interest on it. If your savings interest is more than £10,000, you’ll need to complete a tax return. In other cases, your bank or building society usually reports your interest to HMRC.
If you’re not sure, check your bank statements and use HMRC’s online tools or contact them for advice.
How to declare interest on savings
- Add up all the interest you’ve earned in the tax year (April to April)
- If you complete a self-assessment tax return, include your savings interest on it
- If you don’t do self-assessment, HMRC will adjust your tax code
How to avoid paying tax on savings
You can reduce the tax you pay on savings by using the allowances and accounts available to you. Here are the most effective ways:
- Stay within your personal savings allowance: Keep an eye on your interest so you don’t go over your PSA threshold
- Use your ISA allowance: Each tax year, you can save or invest up to £20,000 in ISAs without paying tax on interest or returns. The allowance resets each year, so make the most of it before the deadline
- Share savings with your partner: If you have a spouse or civil partner, split your savings to use both tax-free allowances. For joint accounts, interest is usually divided equally for tax purposes, so couples can earn up to £2,000 tax-free if both are basic rate taxpayers
Tax-free savings accounts: How do they work?
What is a tax-free savings account?
It’s an account where the interest you earn isn’t taxed. In the UK, the main types are ISAs and Premium Bonds.
Types of ISAs
The main ISA types are:
- Cash ISA: Save money and earn tax-free interest
- Stocks and shares ISA: Invest in funds, shares or bonds
- Lifetime ISA: Save for your first home or retirement with a government bonus
- Innovative finance ISA: Invest in peer-to-peer lending
- Junior ISA: For under-18s, opened by a parent or guardian
You can pay into more than one ISA each tax year, up to the £20,000 overall limit. Different rules apply to Lifetime ISAs. And you can keep ISAs from previous years.
Budget 2025 update: From 6 April 2027, the cash ISA limit will fall to £12,000 for people aged under 65. It will remain £20,000 for people aged 65 or over. The overall ISA allowance will remain £20,000.
What are the best tax-free investments?
The right investment option for you depends on your goals and how much risk you’re comfortable with. Popular choices include:
- Stocks and shares ISAs: Invest in funds, shares or bonds. Returns can be higher, but your money can go up or down
- Lifetime ISAs: Ideal for saving for your first home or retirement. You can save up to £4,000 a year until you turn 50. Start before 40 and the government adds a 25% bonus (up to £1,000 a year). Choose cash, investments or both
- Premium Bonds: Buy bonds for a chance to win tax-free prizes. There’s no guaranteed interest, but any prize you win is tax-free
How does a tax-free savings account work?
You don’t pay any tax on the interest, dividends or capital gains earned from an ISA, no matter how much you make. Withdrawals are also tax-free.
Tax treatment of different accounts
| Account type | Tax-free? | Allowance applies? | Notes |
|---|---|---|---|
| Cash ISA | Yes | No | Up to £20,000/year (2026-27) Allowance for most savers will change from April 2027. Check GOV.UK for the latest position |
| Stocks and shares ISA | Yes | No | Up to £20,000/year |
| Lifetime ISA | Yes | No | Up to £4,000/year, 25% government bonus |
| Premium Bonds | Yes | No | Offers tax-free prizes |
| Regular savings account | No | Yes | PSA applies |
| Fixed-rate bond | No | Yes | PSA applies |
| Current account | No | Yes | PSA applies |
Choosing the best savings option for you
It’s important to get to know different savings account types and their benefits and limitations, so you can choose the option or mix of options that’s best for you.
Key takeaways
- You only pay tax on savings if your interest goes over your personal savings allowance
- Your allowance is based on your tax band: £1,000 for basic, £500 for higher rate. There’s no allowance for the top tax band
- If you earn under £17,570, you may get an extra £5,000 tax-free. Couples can share allowances
- ISAs let you save up to £20,000 tax-free each year; check GOV.UK for allowance changes from April 2027
- Banks and building societies report your interest to HMRC. If you complete a self-assessment tax return, you must also report your savings interest on it
Remember, changes are coming to tax and tax-free allowances so always check the latest information on GOV.UK to be sure.
Find out more about our ISAs
Common questions
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You only pay tax if your interest goes over your personal savings allowance. Most people don’t pay tax on savings interest.
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Yes, but only if it goes over your allowance. ISAs and Premium Bonds are always tax-free.
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Up to £1,000 for basic rate taxpayers, £500 for higher rate, and £0 for additional rate. ISAs are always tax-free.
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HMRC usually collects tax through your tax code. If you do self-assessment, declare your interest on your tax return.
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Use your ISA allowance, split savings with your partner, and keep interest below your allowance. Read more about making the most of your tax-free allowances each year.
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If you complete a self-assessment tax return, you must report your savings interest on it. If your savings interest is more than £10,000, you’ll need to complete a tax return.
Further reading
Visit the HMRC pages on GOV.UK for more information on:
Changes to tax rates for property, savings and dividend income
More savings and banking options
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Easy access savings
Keep your money somewhere safe, but withdraw whenever you like
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Fixed rate savings
Saving for the longer term? Earn a fixed rate of interest for a set period of time
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Everyday banking
Pay in money or withdraw cash from your bank account at thousands of our branches
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