Interest on ordinary savings accounts is taxable income, but two separate allowances mean many savers owe nothing. This article explains how those allowances work, how they combine, and how any tax due is worked out.
Why does savings interest count as income at all?
Interest paid on money in a bank or building society account is treated as income, in the same way as wages or a pension. According to GOV.UK, most people can earn some interest from their savings without paying tax on it. Whether tax is due depends on three things: how much interest you earn, your other taxable income, and your tax-free allowances.
That framing matters because it explains why two people with identical savings can have different tax outcomes. The savings balance and the interest rate decide the interest; everything else comes from the rest of a person’s finances. Interest held inside an ISA sits outside this discussion, which is about interest on ordinary savings. Our article on what the cash ISA limit cut means for savers covers the wrapper that shelters interest from tax.
The Personal Allowance comes first
Everyone starts with the Personal Allowance. GOV.UK gives the standard figure as £12,570 for the 2026 to 2027 tax year, and income up to that amount is taxed at 0%. Above it, the same page sets out these rates for England, Wales and Northern Ireland:
| Band | Income | Rate |
|---|---|---|
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Scotland sets different bands for non-savings income, so these figures do not apply in the same way there. The Personal Allowance also shrinks by £1 for every £2 of adjusted net income above £100,000, and GOV.UK says it is zero at £125,140 or above.
Importantly for savers, the allowance is applied to wages, pensions and other income first. According to GOV.UK, any unused part of the Personal Allowance is then applied to savings interest. Someone with very little other income can therefore receive a fair amount of interest tax-free before any other allowance is needed.
What is the Personal Savings Allowance?
The Personal Savings Allowance, or PSA, is a tax-free amount of interest that depends on your Income Tax band. GOV.UK lists it as follows:
| Income Tax band | Personal Savings Allowance |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
Your band is decided by adding all of your savings interest to your other income. That detail catches people out: a large amount of interest can push someone into a higher band, and a smaller allowance, than their wages alone would suggest.
Interest above the allowance is usually taxed as ordinary income at the rate for your band. In the worked example on the GOV.UK page, a basic rate taxpayer who earns £1,300 in interest has the first £1,000 untaxed. The remaining £300 is taxed at 20%, which gives £60 of tax.
What is the starting rate for savings?
The starting rate for savings is a separate, extra allowance aimed at people with lower incomes. According to GOV.UK, up to £5,000 of interest can be tax-free if your other taxable income, excluding savings interest and dividends, is below £17,570.
That figure is not a cliff edge. GOV.UK explains that every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1. With a Personal Allowance of £12,570, the £5,000 starting rate is therefore reduced pound for pound as other income rises from £12,570 towards £17,570, and is gone once other income reaches £17,570 (£12,570 plus £5,000).
GOV.UK says you can receive the starting rate for savings and the PSA together. The page’s own example has someone earning £16,000 in wages and £200 in interest. The Personal Allowance covers the first £12,570 of wages, leaving £3,430 above it. That cuts the starting rate to £1,570 (£5,000 minus £3,430), so the £200 of interest is untaxed.
Worked examples: three savers, three outcomes
The following illustrative arithmetic applies the GOV.UK rules above for the 2026 to 2027 tax year, for a taxpayer in England, with wages as the only other income. The amounts are invented for illustration, not typical figures.
Saver A: wages of £30,000 and £1,500 of interest.
- Wages above the Personal Allowance: £30,000 minus £12,570 is £17,430.
- That exceeds £5,000, so the starting rate for savings is nil.
- Saver A is in the basic rate band, so the PSA is £1,000.
- Interest above the PSA: £1,500 minus £1,000 is £500.
- Tax: 20% of £500 is £100.
Saver B: wages of £15,000 and £4,000 of interest.
- Wages above the Personal Allowance: £15,000 minus £12,570 is £2,430.
- Starting rate remaining: £5,000 minus £2,430 is £2,570.
- Interest left after the starting rate: £4,000 minus £2,570 is £1,430.
- Saver B is a basic rate taxpayer, so the PSA of £1,000 applies, leaving £430.
- Tax: 20% of £430 is £86.
Saver C: wages of £60,000 and £800 of interest.
- Saver C is in the higher rate band, so the PSA is £500 and the starting rate is nil.
- Interest above the PSA: £800 minus £500 is £300.
- Tax: 40% of £300 is £120.
Saver D: wages of £10,000 and £6,000 of interest.
- Unused Personal Allowance: £12,570 minus £10,000 is £2,570, applied to interest.
- Interest left: £6,000 minus £2,570 is £3,430.
- Other income is below the Personal Allowance, so the full £5,000 starting rate is available and covers the £3,430.
- Tax: nil.
Saver C pays more tax on less interest than Saver A. That is the effect of the lower higher-rate allowance and the higher 40% rate, and it shows why the band matters as much as the balance.
Do you have to tell HMRC about your interest?
In most cases HMRC learns about it without you doing anything. GOV.UK says that after 5 April each year, your bank or building society tells HM Revenue and Customs about the interest it paid you for the previous tax year. HMRC adds together the interest from all of your savings accounts to work out your total.
If tax is owed, GOV.UK says HMRC sends a tax calculation, usually as a letter in the post or a notification in your Personal Tax Account. It shows the tax owed for the previous tax year and usually breaks down the interest by account. If you think the figures are wrong, the calculation is the place to start checking, rather than assuming it is correct.
How does a joint account change things?
Each person is taxed on their own share of interest, not on the total. For joint accounts, GOV.UK says HMRC will split the interest earned equally between the account holders. If you believe it should be split differently, you can contact HMRC.
In practice this means a couple can each use their own allowances against their half. A couple with £2,000 of interest on a joint account would each be treated as having £1,000, before considering any other savings held in their separate names. Whether one partner is a basic rate taxpayer and the other a higher rate taxpayer will change the result, because their PSAs differ.
Why rates and balances change the picture
Allowances are fixed amounts, but interest is not. A higher rate of interest or a larger balance brings more interest, and the same allowance covers a smaller share of it. For general background on how household cash is held and used, see our piece on how UK households manage cash. Our guide to how tax works on investments outside an ISA covers the equivalent questions for dividends and gains.
There is also a timing angle. The tax year runs from 6 April to 5 April, and interest is assessed per tax year.
A useful habit is to keep a note of the total interest across all accounts, not just the main one. Because HMRC adds every account together, several small balances can combine into an amount that exceeds an allowance. Building a buffer is part of what financial resilience means, but interest from that buffer still counts as income.
The questions to ask are straightforward. What is your total interest across every account? What is your other taxable income, and which band does the combined figure place you in? Does any unused Personal Allowance or starting rate for savings apply? Answering those in order mirrors how the rules are applied. Anyone with a more complicated position, including Scottish taxpayers or those near the £100,000 threshold, should check GOV.UK or take regulated advice.
Conclusion: three allowances, one running total
Savings interest is taxed only when it exceeds what the allowances cover. The Personal Allowance, the starting rate for savings and the PSA stack in a defined order, and the band you fall into decides how much is left. The £1,000, £500 and £0 PSA figures and the £5,000 starting rate are the figures to remember, but the position is personal and changes with income and interest. Checking the total across accounts each year is the simplest way to avoid surprises.
This article is general information, not personalised financial advice. Tax rules, allowances and rates can change.
Sources: GOV.UK
