Tax on Savings Interest: When You Start Paying

Save around £22,000 in an easy-access account paying 4.5% and your interest crosses the Personal Savings Allowance, the slice of interest you're allowed to earn tax-free each year. Everything above it is taxed at your income tax rate. Most people never get a bill for it, because HMRC collects the money quietly through a change to your tax code the following year.

Last updated: 16 August 2026

What you can earn before you pay anything

The Personal Savings Allowance depends on your income tax band, and it drops sharply as you move up:

Basic rate: £1,000. Interest above that is taxed at 20%.
Higher rate: £500. Interest above that is taxed at 40%.
Additional rate: nothing. Every pound of interest is taxed at 45%.

Those figures have been the same since April 2016 and the November 2025 Budget left them alone again. Interest rates have not stood still in the same way. Through the near-zero years the allowance was academic, because £1,000 of interest meant a balance most people never had. At the rates on offer now it takes a fairly ordinary emergency fund.

The starting rate for savings

There's a second allowance on top, and it only helps people with low income from other sources. The starting rate for savings gives you up to £5,000 of interest at 0%, but it shrinks by £1 for every £1 of non-savings income you have above the £12,570 personal allowance. Once your other income reaches £17,570 it's gone entirely.

Say your pension and earnings come to £14,000. That's £1,430 above the personal allowance, so your starting rate falls from £5,000 to £3,570. Add the £1,000 Personal Savings Allowance and you can take £4,570 of interest before paying a penny. Anyone on a full-time salary can ignore this one.

The balance where you tip over

The allowance is a limit on interest, not on savings, so the balance that breaches it moves with the rate you're getting.

Your interest rate	Basic rate (£1,000)	Higher rate (£500)
4.0%	£25,000	£12,500
4.5%	£22,200	£11,100
5.0%	£20,000	£10,000

Balance needed to use up the whole allowance in one tax year. Rounded to the nearest £100.

A higher rate taxpayer with a decent emergency fund is already past it. Three months of outgoings for most households sits above £11,100, so the tax starts before the saving even feels ambitious.

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What the bill actually comes to

Only the interest above your allowance is taxed, and it's taxed at your normal income tax rate. Here's what that costs across a range of balances, all at 4.5%:

Balance	Interest	Basic rate tax	Higher rate tax
£10,000	£450	£0	£0
£20,000	£900	£0	£160
£30,000	£1,350	£70	£340
£50,000	£2,250	£250	£700
£75,000	£3,375	£475	£1,150
£100,000	£4,500	£700	£1,600

2026/27 rates. Assumes 4.5% interest and no starting rate for savings. Tax is (interest minus allowance) at 20% or 40%.

The numbers stay small for a while and then stop being small. A higher rate taxpayer holding £100,000 in cash hands over £1,600 a year, which is most of the reason cash starts looking expensive once a house deposit is sitting in an account waiting to be spent. If you want to see what a balance grows to before working out the tax on it, the Compound Interest Calculator projects it forward.

How HMRC finds out, and how you pay

Your bank tells them. Banks and building societies report the interest they've paid you to HMRC after the end of each tax year, so there's nothing to declare and no way to overlook it. What you owe is worked out from that report.

If you're on PAYE, HMRC collects it by changing your tax code, which is why this catches people out. The tax on last year's interest comes out of this year's payslips, usually as a small monthly reduction rather than a demand. Your code drops, your take-home falls slightly, and nothing on the payslip says the word "savings". If your code has moved and you want to see the effect on your pay, the Take-home Pay Calculator shows it, and our guide to tax codes explains how to read the code itself.

HMRC estimates the coming year from what you earned last year, so a code based on a chunky one-off balance can keep taxing you after the money's gone. You can correct the estimate through your Personal Tax Account. Above £10,000 of savings and investment income you need to register for Self Assessment and report it yourself.

Scotland: your savings are taxed at UK rates

The Scottish Parliament sets income tax on earnings, pensions and property income. It has no power over savings income, so interest is taxed at 20%, 40% or 45% wherever in the UK you live. The Personal Savings Allowance is UK-wide too.

That produces a result worth knowing about, and several sites state it backwards. Which allowance you get is decided by the UK thresholds, not the Scottish ones. The legislation asks whether your income would be taxed at the higher rate if you were not a Scottish taxpayer, so the number that matters is £50,270, not the Scottish higher rate threshold of £43,663.

Take a Scottish taxpayer on £48,000 with £1,500 of interest. They're paying the Scottish higher rate of 42% on the top slice of their salary. For savings, though, they're below £50,270, so they keep the full £1,000 allowance and the remaining £500 of interest is taxed at the UK basic rate of 20%. The bill is £100. Their next pound of salary costs 42p in tax; their next pound of interest costs 20p.

Identical income in England produces an identical £100. On savings there's no Scottish penalty at all, which makes it one of the few places the two systems agree. Everywhere they don't is covered in Scotland vs England income tax.

It gets more expensive on 6 April 2027

The November 2025 Budget raised tax on savings income by 2 percentage points across every band from 6 April 2027. Basic rate goes from 20% to 22%, higher rate from 40% to 42%, and additional rate from 45% to 47%. The allowances don't move, so the change hits everyone already over the line.

On £50,000 at 4.5%, a basic rate taxpayer goes from £250 a year to £275, and a higher rate taxpayer from £700 to £735. It's a nudge rather than a shock, but it arrives alongside two ISA changes in the same Budget: the cash ISA limit falls to £12,000 a year for under-65s, and interest on cash held inside a stocks and shares ISA picks up a 22% charge. Both start on the same date and both are covered in the guide to the ISA cash charge.

How to stop paying it

Move the cash into an ISA

Interest inside an ISA is tax-free and doesn't touch your Personal Savings Allowance. You can pay in £20,000 this tax year, and a couple can shelter £40,000 between them. Use the provider's transfer process for money already in an ISA rather than withdrawing it, which would cost you the wrapper.

Put savings in the lower earner's name

Allowances belong to people, so a couple gets two. If one of you is a basic rate taxpayer and the other is higher rate, holding the savings in the basic rate name doubles the sheltered interest from £500 to £1,000 and halves the rate on the rest. Interest on a joint account is split 50/50 for tax, with each half set against that person's own allowance.

Premium Bonds and NS&I

Premium Bond prizes are tax-free and don't count towards the allowance. The trade-off is that the prize fund rate is an average, and plenty of holders win nothing in a given year, so the return is less predictable than interest. Some other National Savings and Investments products are tax-free too, though most aren't.

Chasing the highest headline rate matters less once you're over the allowance, because the tax comes off whatever you earn. A 4.5% savings account paying a higher rate taxpayer nets 2.7% after tax, and 2.61% from April 2027, so a cash ISA at 4.2% beats it comfortably. Work out how much of your £20,000 to use, and where, with the ISA Allowance Planner.

Frequently asked questions

How much can I have in savings before I pay tax?

There is no limit on the balance. What gets taxed is the interest it earns. At 4.5%, a basic rate taxpayer uses up the £1,000 Personal Savings Allowance at around £22,200 of savings, and a higher rate taxpayer uses up their £500 at around £11,100. Additional rate taxpayers get no allowance, so the first pound of interest is taxable.

How does HMRC know how much savings interest I have earned?

Your bank or building society reports it automatically after the end of each tax year. You do not have to tell them. If you are paid through PAYE, HMRC then changes your tax code to collect what you owe, which is why interest earned in one tax year is usually paid for out of the next year's payslips.

Do I need to file a tax return for savings interest?

Only if your income from savings and investments is over £10,000. Below that, HMRC collects the tax through your tax code, or through your Self Assessment return if you already file one for another reason.

Is the Personal Savings Allowance different in Scotland?

No. Tax on savings income is not devolved, so the allowance and the rates are identical across the UK. A Scottish taxpayer earning £48,000 pays the Scottish higher rate of 42% on their salary but the UK basic rate of 20% on their savings interest, and keeps the full £1,000 allowance, because their income sits below the UK higher rate threshold of £50,270.

What happens to savings tax in April 2027?

Savings income tax rates rise by 2 percentage points across every band from 6 April 2027, to 22%, 42% and 47%. The Personal Savings Allowance and the starting rate for savings are unchanged. A higher rate taxpayer with £50,000 saved at 4.5% goes from £700 a year to £735.

Does interest earned in an ISA count towards the allowance?

No. Interest inside an ISA is tax-free and uses up none of your Personal Savings Allowance, which is what makes an ISA the standard fix once you breach it. Premium Bond prizes and certain National Savings and Investments products sit outside it too.