Do You Pay Tax on Savings Interest? (2025/26 Guide)

Do you pay tax on interest from savings?

Yes — in most cases, interest earned on savings is taxable. However, many people do not actually pay tax on it due to available allowances.

Interest earned within an ISA remains completely tax-free.

For all other savings, banks and building societies now pay interest gross (without deducting tax), and it is your responsibility to declare and pay any tax due.

How much savings interest is tax-free?

There are two key allowances that can reduce or eliminate tax on your savings interest:

1. Personal Savings Allowance (PSA)

For the 2025/26 tax year:

• Basic rate taxpayers (20%) → £1,000 tax-free interest
• Higher rate taxpayers (40%) → £500 tax-free interest
• Additional rate taxpayers (45%) → £0 allowance

2. Starting Rate for Savings (up to £5,000)

You may also benefit from a 0% starting rate band for savings income of up to £5,000.

However, this depends on your other income.

• The £5,000 band is reduced by your non-savings income above your Personal Allowance (£12,570)
• If your non-savings income exceeds £17,570, the starting rate band is fully lost

Non-savings income includes:

• Salary
• Pensions
• Rental income
• Trading profits

What happens if you exceed your allowances?

Any savings interest above your allowances is taxed at your normal Income Tax rates:

• 20% (basic rate)
• 40% (higher rate)
• 45% (additional rate)

Example: How savings interest is taxed

Assume:

• Salary: £17,500
• Savings interest: £1,500

After the Personal Allowance (£12,570), taxable salary is £4,930.

This reduces the starting rate band:

• £5,000 – £4,930 = £70 of starting rate band remaining

The remaining interest is then covered by the £1,000 PSA.

Only the excess is taxed at 20%.

Planning opportunity: reducing your tax bill

The amount of tax you pay on savings interest depends heavily on your income mix.

For example, reducing salary or other income can:

• Increase your available starting rate band
• Allow more interest to be taxed at 0%

In your example, restructuring income reduced tax from £1,100 to £350 — demonstrating how effective planning can be.

Important point: company-paid interest

If you lend money to your company:

• The company must deduct 20% tax at source
• You can reclaim this tax via your tax return if your allowances cover the income

This is often misunderstood and is an important planning area.

Common mistakes to avoid

• Assuming all savings interest is tax-free
• Forgetting that the starting rate band depends on other income
• Not declaring interest if it exceeds allowances
• Missing reclaim opportunities on company-paid interest

Do you need to report savings interest?

You may need to report your savings interest if:

• It exceeds your allowances
• You complete a Self Assessment tax return
• HMRC has not already adjusted your tax code

HMRC often receives interest data directly from banks, but you are still responsible for ensuring it is correct.

Final thoughts

Most people do not pay tax on savings interest due to the available allowances — but once your income increases, tax can arise quickly.

Understanding how the Personal Savings Allowance and Starting Rate Band interact is key to minimising your tax liability.

If you have significant savings or company loans, reviewing your income structure can result in meaningful tax savings.