Tax on Savings Interest

Most people can now earn interest on their savings without paying tax, thanks to generous allowances that apply on top of your Personal Allowance. Understanding these allowances — particularly the Personal Savings Allowance and the starting rate for savings — helps you know whether you'll owe tax on your savings interest and what to do if you've overpaid.

Your tax-free allowances for savings interest

You have three potential allowances that let you earn interest without paying tax in the 2025/26 tax year:

Personal Allowance

You can use any unused portion of your Personal Allowance (£12,570 for most people) to earn tax-free interest. If your wages, pension or other income don't use up your full Personal Allowance, the remainder can cover savings interest.

Starting rate for savings

This gives you up to £5,000 of tax-free savings interest, but only if your other income is below £17,570. If you earn £17,570 or more from wages, pension or other sources, you don't qualify for this allowance at all.

If your other income is between your Personal Allowance and £17,570, your starting rate reduces pound-for-pound. For every £1 of income above £12,570, your starting rate for savings reduces by £1.

Here's how it works: if you earn £16,000 in wages and receive £200 savings interest, your Personal Allowance of £12,570 is used by your wages first. The remaining £3,430 of wages (£16,000 minus £12,570) reduces your starting rate for savings from £5,000 to £1,570. Your £200 interest falls within this £1,570 allowance, so you pay no tax.

Personal Savings Allowance

This is the allowance most people use. It gives you tax-free interest based on your Income Tax band:

• Basic rate taxpayers: £1,000
• Higher rate taxpayers: £500
• Additional rate taxpayers: £0

To work out which band you're in, add all your interest to your other income.

What types of interest are covered

Your Personal Savings Allowance applies to interest from:

• Bank and building society accounts
• Savings and credit union accounts
• Unit trusts, investment trusts and open-ended investment companies
• Peer-to-peer lending
• Trust funds
• Payment protection insurance (PPI) payouts
• Government or company bonds
• Life annuity payments
• Some life insurance contracts

Savings in Individual Savings Accounts (ISAs) and certain National Savings and Investments accounts are already tax-free and don't count towards your allowance at all. Different rules apply for foreign savings and children's accounts.

Joint accounts

If you hold a joint savings account, HMRC splits the interest equally between account holders. Contact HMRC if you believe the interest should be divided differently.

When you pay tax on savings interest

If your interest exceeds your available allowances, you pay tax at your usual Income Tax rate on the amount over your allowance.

If you're self-employed

Report any interest earned on your Self Assessment tax return. You must register for Self Assessment if your income from savings and investments exceeds £10,000.

If you're employed or receive a pension

HMRC will adjust your tax code to collect the tax automatically. They estimate your current year's interest based on what you earned the previous year.

You'll receive a tax calculation letter between June and March of the following tax year if you've overpaid or underpaid tax. If you've gone over your allowance and haven't received a letter by 31 March of the following tax year, contact HMRC as soon as possible to avoid penalties.

If you're not employed, don't receive a pension and don't complete Self Assessment

Your bank or building society reports your interest to HMRC at the end of the year. HMRC will contact you if you need to pay tax and explain how to pay.

Claiming refunds if you've overpaid tax

You can reclaim tax paid on savings interest if it was below your allowances. You must claim within 4 years of the end of the relevant tax year.

If you complete a Self Assessment tax return, claim through that.

If you don't complete Self Assessment, you can claim a refund if your:

• Gross income from savings and investments is £10,000 or less
• Gross income from land and property is £10,000 or less
• Net income from land and property is £2,500 or less

To claim a refund of tax deducted from interest, you'll need evidence from the company that paid you showing the gross interest, tax deducted, and net interest. Send this by post to:

Pay As You Earn

HM Revenue and Customs

BX9 1AS

United Kingdom

Submit a separate claim for each tax year. You'll need details of all your income, which you can find on your P60 or P45, bank statements, benefit letters, dividend vouchers, and income statements from trusts or estates.

Previous tax years

If you're self-employed and need to declare savings interest from a previous tax year, report it in your Self Assessment tax return.

If you're employed or receive a pension, HMRC automatically deducts any tax owed on savings interest from previous years.

Sources

• Tax on savings interest
• The starting rate of tax for savings: guidance
• Claim a refund if you've paid tax on your savings and investments

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.