Tax on Savings Interest – UK Allowances, Rates and How to Pay

Rising interest rates have pushed more savers above the tax-free thresholds in recent years, making it essential to understand how the UK taxes savings interest. The system relies on three main allowances: the Personal Allowance, the starting rate for savings, and the Personal Savings Allowance (PSA). Most people will not pay tax if their total interest stays within these limits.

For the 2025/26 and 2026/27 tax years the Personal Savings Allowance remains frozen, according to HM Revenue & Customs (HMRC) and other sources such as Fidelity and the Association of Taxation Technicians (ATT). Basic-rate taxpayers can earn up to £1,000 of interest tax-free each year, higher-rate taxpayers up to £500, and additional-rate taxpayers receive no allowance.

Key insights at a glance

• The Personal Savings Allowance has been frozen at current levels until at least 2028, so rates are unlikely to change in 2027.
• Most basic-rate taxpayers will not need to pay tax on savings interest unless they exceed £1,000 or have other income pushing them into a higher band.
• Pensioners with low total income may qualify for the starting rate for savings – up to £5,000 interest at 0%.
• HMRC automatically collects tax by adjusting your tax code – you only need to file a tax return if already required or if interest exceeds £10,000.
• Martin Lewis advises checking your tax code, using ISAs first, and ensuring you are not overpaying tax due to incorrect allowances.

Do I have to notify HMRC of my savings interest and how is the tax collected?

According to GOV.UK guidance on savings interest, most people do not need to actively tell HMRC about their savings interest. Instead, HMRC collects tax automatically through your tax code if you are employed or receive a pension. The system works by estimating your current-year interest based on what you earned the previous year.

How the tax collection process works

If you are employed or get a pension, HMRC may adjust your tax code to collect the tax due. You will receive a tax calculation letter between June and March of the following tax year if there has been an overpayment or underpayment. For those who are not employed, do not receive a pension, or do not complete a Self Assessment return, your bank or building society reports the interest to HMRC after the tax year ends. HMRC then contacts you with instructions on how to pay.

It is worth checking your tax code via your HMRC Personal Tax Account to ensure it reflects the correct allowances. Martin Lewis on MoneySavingExpert advises checking for errors, as a wrong tax code can lead to overpayment.

Do pensioners pay tax on savings interest?

Pensioners are subject to the same rules as other taxpayers, but their situation is often more complex because pension income typically uses up most or all of the £12,570 Personal Allowance. That leaves the Personal Savings Allowance as the main protection for any savings interest. If total taxable income pushes a pensioner into the higher-rate band, the PSA falls from £1,000 to £500, and additional-rate taxpayers receive nothing.

Many pensioners with modest savings have been caught out in recent years as interest rates rose, pushing them over the allowance. However, a valuable relief exists: the starting rate for savings. If your other income (including pensions) is below £17,570, you may be able to earn up to £5,000 of savings interest at a 0% rate. This is reduced by £1 for every £1 of other income above the Personal Allowance.

How can I avoid paying tax on savings interest?

The most straightforward way to avoid tax on savings interest is to use tax-efficient accounts such as Cash ISAs or Stocks and Shares ISAs. The annual ISA allowance is £20,000 for the 2025/26 tax year, and all interest or investment growth inside an ISA is tax-free. MoneyHelper explains that ISAs are the main alternative for savers who have already used their Personal Savings Allowance.

Another strategy is to ensure your savings are spread across accounts so that interest does not exceed your allowances in any one year. You can also review your tax code – if HMRC has estimated your interest too high, you can ask for a correction. Aviva notes that using multiple tax wrappers can help manage your exposure.

Martin Lewis recommends prioritising ISAs and checking whether you are due any tax back if you have been overcharged. He also points out that some “reward” current accounts may pay interest in a way that qualifies for the PSA – but it is important to check the product terms. For more on tax-free saving, see our Complete guide to ISAs and tax-free savings.

What will the tax on savings interest be in 2027?

As of 2025, the government has frozen the Personal Savings Allowance at its current levels until at least April 2028. This means that for the 2027/28 tax year the allowances are expected to remain the same: £1,000 for basic-rate, £500 for higher-rate, and £0 for additional-rate taxpayers. However, there is speculation about a potential crackdown on savings tax compliance. Reports indicate that Rachel Reeves, the Shadow Chancellor, has discussed tightening rules, but no legislation has been enacted yet.

Timeline of key dates

1. 6 April 2025 – Start of 2025/26 tax year; current allowances apply.
2. 6 April 2026 – Start of 2026/27 tax year; allowances frozen again (no change).
3. 6 April 2027 – Expected continuation of frozen allowances unless government announces change (budget speculation).
4. 6 April 2028 – Allowance freeze scheduled to end; potential adjustments to Personal Savings Allowance or rates.

How can I calculate the tax I owe on savings interest?

Calculating your tax on savings interest involves a step-by-step process. Begin by working out your total income from all sources, including wages, pension, savings interest, dividends, and other taxable income. Then deduct your Personal Allowance (£12,570 if applicable). After that, check whether the starting rate for savings applies: if your non-savings income is below £17,570, you can use up to £5,000 of the starting rate. Finally, apply the Personal Savings Allowance based on your tax band. Any remaining interest is taxed at your marginal rate: 20%, 40%, or 45%.

For a practical example, consider a basic-rate taxpayer with a pension of £15,000 and savings interest of £1,500. The Personal Allowance covers the first £12,570 of pension. The remaining £2,430 of pension uses part of the starting rate band, so only a portion of the starting rate for savings is available. After applying the £1,000 PSA, the remaining £500 of interest is taxed at 20%.

What is clearly established and what remains unclear about savings tax?

Why is this topic relevant now?

Rising interest rates have pushed more savers over the Personal Savings Allowance, increasing the number of people paying tax on savings for the first time. The government’s freeze on allowances means more tax revenue, but also calls for simplification. Martin Lewis and consumer groups advise maximising ISAs and checking tax codes to avoid overpayment. Recent reports suggest HMRC is sending letters to savers to ensure compliance, while Labour’s Rachel Reeves has hinted at a crackdown on savings tax avoidance, though no concrete changes have been legislated.

What do the experts and official sources say?

“You may also get up to £1,000 of interest and not have to pay tax on it, depending on which Income Tax band you’re in. This is your Personal Savings Allowance.”

– HMRC / gov.uk

“If you’re a basic-rate taxpayer, you can earn up to £1,000 in savings interest tax-free each tax year. Higher-rate taxpayers can earn up to £500.”

– Martin Lewis / MoneySavingExpert

“If tax is payable on savings interest, it’s charged at your usual rate of income tax (0%, 20%, 40% or 45%).”

– MoneyHelper (government-backed)

Summary – what you should know now

Understanding your Personal Savings Allowance and using tax-efficient accounts like ISAs can help you avoid unnecessary tax on savings interest. For most people, HMRC handles collection automatically through tax code adjustments, but it pays to check your tax code and know your allowances. For a broader view of tax-free saving options, see our Complete guide to ISAs and tax-free savings.

Frequently asked questions about tax on savings interest