Do you pay tax on savings interest?

Yes — all interest you receive is taxable, unless it is earned within a tax-free wrapper such as an ISA.

However, most people do not actually pay tax on their savings interest due to available allowances.

Banks and building societies now pay interest without deducting tax, so it is your responsibility to ensure the correct tax is paid if required.

How much interest is tax-free?

There are two main 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%) → No allowance

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

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

However, this depends on your other income.

The 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.

What counts as non-savings income?

Non-savings income includes:

• Salary
• Pensions
• Rental income
• Trading profits

The higher your non-savings income, the less of the £5,000 starting rate band you can use.

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)

Planning opportunity

If you can control how your income is structured, you may be able to reduce the tax you pay.

For example:

• Reducing salary or other income may increase your starting rate band
• Shifting income between spouses can maximise allowances
• Using ISAs can eliminate tax completely

Common mistakes to avoid

• Assuming all savings interest is tax-free
• Forgetting that the starting rate band depends on other income
• Not declaring interest where required
• Missing simple tax planning opportunities

Final thoughts

While savings interest is technically taxable, many individuals pay no tax due to the Personal Savings Allowance and Starting Rate Band.

Understanding how these interact with your other income is key to minimising your tax liability.

ACTION POINT!

Can your mix of income be made more tax-efficient?