How much tax will you pay on
savings interest?

How Tax on Savings Interest Works

When you earn interest on savings held in bank accounts, building societies, or NS&I products, that interest counts as taxable income. However, most savers pay no tax at all thanks to the Personal Savings Allowance (PSA), which was introduced in April 2016.

The PSA sits on top of your Personal Allowance. HMRC applies your non-savings income first (employment, self-employment, pensions, rental), then stacks savings interest on top. This stacking order matters because it determines which tax band your savings interest falls into, and therefore which PSA you receive.

Since April 2016, banks and building societies report your interest directly to HMRC. HMRC then adjusts your tax code to collect any tax due through PAYE, or includes it in your Self Assessment if you file a tax return.

The Starting Rate for Savings: Who Qualifies?

If your total non-savings income (employment, self-employment, pensions, rental) is below £17,570, you may qualify for the starting rate for savings. This provides up to £5,000 of savings interest at 0% tax, on top of the PSA.

The £5,000 starting rate band reduces by £1 for every £1 of non-savings income above the £12,570 Personal Allowance. So if your non-savings income is exactly £12,570 or less, you get the full £5,000 band. If your non-savings income is £15,000, your starting rate band shrinks to £2,570 (£17,570 minus £15,000).

This particularly benefits retirees with modest pensions and part-time workers. Combined with the £1,000 PSA, a basic rate taxpayer with low non-savings income could receive up to £6,000 of savings interest completely tax-free.

ISA vs Savings Account: Which is Better for Tax?

Interest earned in an Individual Savings Account (ISA) is always tax-free, regardless of your tax band or PSA status. This makes ISAs the most tax-efficient home for your savings, especially if you are a higher or additional rate taxpayer with a reduced (or zero) PSA.

The annual ISA allowance is £20,000 per tax year. You can split this across Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs. ISA interest does not count towards your PSA, so using your ISA allowance effectively preserves your PSA for interest earned in non-ISA accounts.

For basic rate taxpayers earning under £1,000 in non-ISA interest, the tax benefit of an ISA is minimal since the PSA already covers that amount. But for higher rate taxpayers, or those with large savings balances, ISAs deliver meaningful tax savings year after year.

Does Your Bank Deduct Tax at Source?

No. Since April 2016, UK banks and building societies no longer deduct tax from your savings interest. You receive the gross (full) amount of interest, and HMRC collects any tax owed separately.

For PAYE employees and pensioners, HMRC typically adjusts your tax code to collect savings tax through your wages or pension payments. This means you may see a lower tax code (for example, 1157L instead of 1257L), which reduces your monthly take-home pay slightly to account for the savings tax.

If you believe you have been overtaxed on savings interest, you can contact HMRC to request a review. Overpayments can be reclaimed through Self Assessment or by writing to HMRC directly. Common causes of overpayment include HMRC overestimating your interest (based on prior year data) or applying an incorrect tax code.

Common Mistakes That Cost You Money

Savings tax is one of the most misunderstood areas of UK personal tax. These are the errors that most commonly lead to unexpected bills or missed savings.

Reporting to HMRC: Deadlines and Requirements

Banks and building societies report your interest directly to HMRC each tax year. HMRC uses this data to issue tax code adjustments in April, affecting your PAYE take-home from May onwards. If your interest is higher or lower than estimated, the code will correct the following year.

Self Assessment is required if your untaxed savings interest exceeds £10,000 in any tax year, or if you have any other source of untaxed income above £1,000. The online Self Assessment deadline is 31 January following the end of the tax year.

Overpaid savings tax can be reclaimed via Self Assessment by 31 January of the relevant year (up to 4 years retrospectively), or by writing to HMRC if you do not normally file a return. HMRC typically processes savings tax refunds within 4 to 8 weeks.