Interest on a savings account is taxable income, but most people pay nothing on it because of two separate allowances. This guide explains how they work, how HMRC collects any tax due, and what changes for savings income from April 2027.
Why savings interest is taxed at all
Interest from a bank or building society account counts as income, in the same way as pay or pension income. According to GOV.UK, whether you pay tax depends on three things: how much interest you earn, your other taxable income, and your tax-free allowances. Interest from all your accounts is added together, so spreading money across several providers does not reduce the total HMRC sees.
Cash held in an Individual Savings Account is different. GOV.UK says you do not usually have to pay tax on interest earned in accounts such as ISAs. Some National Savings and Investments products are also not usually taxed, according to the same guidance.
The question matters more than it did a few years ago. When rates on easy-access accounts were close to zero, few savers came near an allowance. With rates higher, as discussed in our look at why cash is making a comeback for high earners, a sizeable cash balance can now generate interest that is genuinely taxable.
What is the Personal Savings Allowance?
The Personal Savings Allowance is a band of interest taxed at 0%. Its size depends on the Income Tax band you fall into once your interest is added to your other income. GOV.UK sets it out as follows:
| Income Tax band | Personal Savings Allowance |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
The allowance shrinks as income rises, and disappears entirely for additional-rate taxpayers. For 2026/27, GOV.UK’s Income Tax rates page gives the Personal Allowance as £12,570, the basic rate as 20% on income from £12,571 to £50,270, the higher rate as 40% from £50,271 to £125,140, and the additional rate as 45% above £125,140.
Interest within the allowance still counts as income. It is taxed at 0%, not ignored, which is why it can push someone across a band boundary. Interest above the allowance is taxed at the rate for the band the saver is in.
How does the starting rate for savings work?
The starting rate for savings is a second, separate 0% band, aimed at people with modest earnings. According to GOV.UK, you can get it if your other taxable income, excluding savings interest and dividends, is less than £17,570. It lets you earn up to £5,000 of interest without paying tax.
The £17,570 figure is not arbitrary: it is the £12,570 Personal Allowance plus the £5,000 band. GOV.UK explains the taper in one line: every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
GOV.UK gives a worked example. Someone earning £16,000 in wages and £200 in interest has the first £12,570 of wages covered by the Personal Allowance. The remaining £3,430 reduces the starting rate band from £5,000 to £1,570, so the £200 of interest is tax free.
Using both allowances together
The two allowances can work in sequence for someone on a lower income with a large cash balance. The following is illustrative arithmetic, not a personal case:
- Wages of £15,000 and savings interest of £3,000.
- Wages above the Personal Allowance: £15,000 − £12,570 = £2,430.
- Starting rate band remaining: £5,000 − £2,430 = £2,570.
- Interest left after that band: £3,000 − £2,570 = £430.
- A basic-rate taxpayer has a £1,000 Personal Savings Allowance, which comfortably covers the remaining £430.
On those figures no tax would be due on the interest, even though it is three times the basic-rate allowance.
What a basic-rate, higher-rate and additional-rate saver pays today
Tax is due only on interest above whichever allowance applies. GOV.UK’s own example shows the principle: a basic-rate taxpayer who earned £1,300 in interest has the first £1,000 covered by the allowance, and the remaining £300 is taxed at 20%, which is £60.
The table below applies the same method to three illustrative savers. It assumes no starting rate for savings applies and uses the current rates of 20%, 40% and 45%.
| Saver | Interest | Allowance | Taxable interest | Tax at current rate |
|---|---|---|---|---|
| Basic rate | £1,800 | £1,000 | £800 | £160 |
| Higher rate | £1,500 | £500 | £1,000 | £400 |
| Additional rate | £1,000 | £0 | £1,000 | £450 |
The additional-rate row is the starkest: with no allowance, every pound of interest is taxed at 45%.
What changes in April 2027?
The Government has announced that tax rates on savings income will rise. According to GOV.UK, tax on savings income will increase by 2 percentage points across all bands from April 2027:
- basic rate: 20% to 22%;
- higher rate: 40% to 42%;
- additional rate: 45% to 47%.
The announcement describes the Personal Savings Allowance and the starting rate for savings as current arrangements, and the rise is a change to rates rather than to the size of either allowance. Readers should check the latest GOV.UK guidance before the new tax year begins, because the detail can be refined in legislation.
Applying the new rates to the same illustrative savers gives the following, using the same interest and allowances as above:
| Saver | Taxable interest | Tax at 2026/27 rate | Tax at April 2027 rate | Difference |
|---|---|---|---|---|
| Basic rate | £800 | £160 | £176 | £16 |
| Higher rate | £1,000 | £400 | £420 | £20 |
| Additional rate | £1,000 | £450 | £470 | £20 |
The increases are modest in pounds for these examples, but they grow with the size of the taxable balance. Two percentage points on £10,000 of taxable interest would be £200 a year.
How does HMRC actually collect the tax?
Most savers never fill in a form for savings interest. GOV.UK says that after the tax year ends on 5 April, banks and building societies report the interest to HMRC. What happens next depends on the amount.
Interest of £10,000 or less
For employees and pension recipients, HMRC usually collects any tax through the tax code. It may adjust the code to recover tax from the previous year and to include an estimate of the current year’s interest. If you owe tax, HMRC sends a tax calculation, usually between June and the following March. Someone with no tax code, or one that cannot be changed, may receive a Simple Assessment letter instead. People who already file a Self Assessment return report the interest there.
GOV.UK gives a timeline: for interest earned in 2025/26, the tax calculation arrives during 2026/27 and the tax is usually collected through the tax code in 2027/28.
Interest above £10,000
If savings interest is more than £10,000, GOV.UK says it must be reported on a Self Assessment tax return. If a bank reports more than £10,000, HMRC sends a notice requiring a return. Anyone who does not already file would need to register.
Is your tax code estimate right?
Because the code includes an estimate of the current year’s interest, it is worth checking. GOV.UK explains that HMRC bases the estimate on last year’s bank data, that you can view it in your Personal Tax Account, and that you can check it by multiplying your average monthly interest by 12.
For example, a saver earning an average of £150 a month in interest would expect an annual figure of about £1,800 (£150 × 12). If the Personal Tax Account shows a very different number, for instance because a fixed-term account has matured or a balance has been spent, GOV.UK says to contact HMRC for a new tax code. It also advises comparing the tax calculation with your bank statements and raising any discrepancy.
Joint accounts are another common source of confusion. According to GOV.UK, HMRC splits joint-account interest equally between the holders, and you can contact HMRC if it should be divided differently. For couples with different tax bands, that equal split can make a difference to how much of the interest falls within an allowance.
What the numbers suggest for cash savers
This section is analysis rather than reporting. The mechanics above point to a few general observations, none of which is a recommendation.
First, the rate on the account is only half the picture. Two savers earning the same interest can face very different bills because of their other income. Second, the allowances are fixed amounts, so as balances or rates rise, more savers will find interest sliding above the line. Third, the April 2027 rise means that interest above an allowance will be taxed more heavily than it is now, which makes the distinction between taxable and sheltered cash more relevant.
Those who want to understand how sheltered accounts fit into the wider picture may find it useful to read about what the Budget has meant for pensions and ISAs, and how deposit protection works under the FSCS, though that article concerns investment firms rather than bank deposits.
Conclusion: know your band before you count your interest
For many savers, interest is still tax free in practice, thanks to the £1,000 and £500 Personal Savings Allowance and the starting rate for savings of up to £5,000. The picture changes for those with larger balances or higher incomes, and the 2-percentage-point rise in savings tax rates due from April 2027 adds to the cost of interest above the allowances. Understanding which allowance applies, and checking the tax code estimate, are the practical ways to avoid surprises.
This article is general information, not personalised financial advice. Tax rules, allowances and rates change, so check current official guidance.
Sources: GOV.UK
