Do banks deduct tax from UK savings interest?

No. Since April 2016 UK banks pay all interest gross. You are responsible for declaring and paying tax above your Personal Savings Allowance. HMRC receives bank-by-bank reports after year-end and reconciles automatically through your tax code or self-assessment.

Is interest from a fixed-rate bond taxed in the year it pays out or accrues?

It is taxed when the interest is paid (the right-to-receive date). A 3-year fixed-rate bond paying interest only at maturity dumps the entire 3-year amount into one tax year, often crashing through the PSA. Choose 'monthly interest' or 'annual paid' versions to spread the income across tax years.

Can I use my spouse's Personal Savings Allowance?

Not directly — the PSA is per individual, non-transferable. But you can move savings into your spouse's name (gifts between UK-domiciled spouses are CGT-free and no income shifting rules apply). If your spouse is a non-taxpayer or basic rate while you are higher rate, transfer enough to use their full £1,000 PSA at 0%.

Does cryptocurrency interest count as savings interest?

No — crypto staking and lending rewards are taxed as miscellaneous income, not as savings interest. They do not benefit from the PSA or starter rate band. Report them on the 'other taxable income' page of self-assessment.

How does HMRC know about my bank interest?

All UK banks and building societies send HMRC an annual report listing every account holder and the interest paid. HMRC then matches this to your tax record. Foreign bank interest is reported by your foreign bank under the Common Reporting Standard and you must declare it on self-assessment.

Will my PSA reduce in 2026/27?

The PSA has been £1,000 / £500 / £0 unchanged since April 2016 and the government has not announced changes for 2026/27. However, the freeze itself acts as a real-terms cut as inflation and rising rates erode the allowance's purchasing power.

Is interest from a cash ISA taxable if I exceed my £20k allowance?

No — interest inside a properly subscribed ISA is permanently tax-free. If you accidentally over-subscribed (paid in more than £20,000 across all ISAs), HMRC will instruct your provider to remove the excess and treat any interest on it as taxable; the legitimate ISA balance remains tax-free.

Tax on Bank Interest UK 2025/26 | PSA + Starter Rate Calculator

How is UK bank interest taxed in 2025/26?

Bank and building society interest in the UK is paid gross — banks no longer deduct tax at source (this changed from April 2016). HMRC instead taxes savings interest through three layered allowances:

Starter rate for savings — 0% on up to £5,000 of savings interest if your non-savings income is below £17,570. The band tapers £-for-£: every £1 of non-savings income above £12,570 reduces the starter band by £1, ending at £17,570.
Personal Savings Allowance (PSA) — sits on top of the starter band. £1,000 if your total income keeps you in the basic rate band, £500 once you cross £50,270, and £0 once total income exceeds £125,140.
Marginal rate — interest above the starter band and PSA is taxed at 20% / 40% / 45% depending on which bands it falls into when stacked on top of your other income.

Interest from ISAs is fully exempt and never uses any of these allowances. Interest from Premium Bonds is also tax-free (the prizes are not classed as interest). Children's bank interest follows the £100 parental settlement rule — anything above £100 per parent is taxed on the parent who funded the gift.

HMRC receives reports from UK banks and building societies after the tax year ends and reconciles your liability automatically through your tax code or self-assessment. If you exceed your PSA, HMRC typically adjusts next year's tax code to collect the underpayment, although you may also receive a P800 calculation letter.

Why bank interest can produce a tax shock in 2025/26

Two changes have made savings interest unexpectedly taxable for many UK households. First, the PSA has been frozen at £1,000 / £500 / £0 since 2016 while interest rates surged from near-zero to over 5% by late 2023. A £25,000 cash deposit at 4.5% now produces £1,125 of interest — already breaching the basic-rate PSA. Second, the basic-rate threshold has been frozen at £50,270 since 2021/22 — the so-called fiscal drag — pushing more savers into the higher rate band where the PSA halves to £500.

For pensioners with State Pension plus modest savings, the starter rate for savings can be the most valuable allowance. A retiree with State Pension of £11,973 (full new amount, 2025/26) plus £15,000 in deposit accounts at 4% (£600 interest) pays no tax: the State Pension uses £11,973 of Personal Allowance, leaving £597 of PA plus the full £5,000 starter band plus £1,000 PSA — total £6,597 tax-free for savings, well above the £600 received.

By contrast, a higher-rate employee earning £60,000 with £30,000 saved at 4.5% (£1,350 interest) loses 40% of every pound above the £500 PSA: £850 × 40% = £340 tax. Moving the same balance to a Cash ISA shelters the full £1,350 from tax indefinitely — a permanent saving of £340/year worth £6,800+ over 20 years on the same balance.

Three worked examples (UK 2025/26)

Example 1: Basic-rate employee with £1,500 interest

Mark earns £35,000 from his job and has £40,000 in deposit accounts paying 3.75%, generating £1,500 of interest in 2025/26. His total income (£36,500) keeps him firmly in the basic rate band so his PSA is the full £1,000. His non-savings income (£35,000) far exceeds £17,570, so the starter band is £0.

Calculation: Interest £1,500 − PSA £1,000 = £500 taxable. Tax at 20% = £100. Net interest £1,400. HMRC typically collects this via a tax code adjustment in the following tax year.

Example 2: Higher-rate professional with £4,000 interest

Priya earns £75,000 and inherits £100,000, parking it in a 4% notice account for one year. Annual interest: £4,000. Her total income (£79,000) is in the higher rate band so PSA = £500. Starter band: £0.

Calculation: £4,000 − £500 PSA = £3,500 taxable. Tax at 40% = £1,400. Net interest £2,600 (effective rate 2.6%). Had Priya put £20,000 into a Cash ISA on 6 April and another £20,000 the following 6 April, she would have saved £8,000 (£20k × 40%) of allowance over two tax years and avoided £200/year of higher-rate tax.

Example 3: Pensioner using starter rate + PSA

Joan, age 72, receives State Pension of £11,973 (full new amount), a small private pension of £4,000, and £6,200 of savings interest from a £140,000 Cash ISA-plus-deposit mix (£70k in ISAs, £70k in deposits at 5% = £3,500 interest in deposit). Wait — let's correct: £70k at 5% = £3,500. Her non-savings income is £15,973 (pension + State Pension), under £17,570.

Calculation: Starter band available: £17,570 − £15,973 = £1,597. PSA: £1,000. Personal Allowance left over: £12,570 − £15,973 = negative, so all PA is used. Interest £3,500 − £1,597 starter − £1,000 PSA = £903 taxable at 20% = £180.60. Net interest £3,319.40 plus the £70k of ISA interest is fully tax-free.

Common mistakes to avoid

Forgetting that the PSA shrinks to £500 once your total income (including the interest itself) crosses £50,270 — high-rate banding.
Assuming peer-to-peer lending interest counts inside an ISA — only IF ISAs (Innovative Finance) qualify; ordinary P2P platforms do not.
Treating ISA interest as part of your PSA — ISA interest is fully exempt and never uses your £1,000/£500 allowance.
Believing children's savings interest is exempt — under the £100 parental settlement rule, interest above £100/parent is taxed on the parent.
Forgetting partner's savings — couples can split balances to use both PSAs (£1,000 + £1,000 = £2,000 tax-free at basic rate).
Missing the starter rate for savings — £5,000 at 0% if non-savings income is below £17,570, often overlooked by retirees.

When to use this calculator

Use this calculator if you receive interest from UK bank accounts, building societies, peer-to-peer platforms (non-IF ISA), corporate bond funds (interest distribution), gilts, or fixed-rate bonds outside an ISA. Run it before each tax year ends to decide whether to top up your ISA or stay in a deposit. Re-run it whenever you have a salary change, redundancy, or large interest event (a maturing fixed-rate bond can dump several years of interest into one tax year). Couples should run it twice (once per partner) to plan optimal asset placement — the £1k + £1k joint PSA is worth £400/year vs single-name savings.

Regional differences (Scotland, Wales, Northern Ireland)

Income tax bands differ in Scotland (Starter 19%, Basic 20%, Intermediate 21%, Higher 42%, Advanced 45%, Top 48%). However, savings interest, dividends, and capital gains are taxed at UK-wide rates regardless of where you live, because these are reserved (non-devolved) tax categories. Wales uses UK rates for income tax (the Welsh rate is currently 10p matched to UK basic rate). Northern Ireland uses UK rates throughout. Your Personal Savings Allowance, Dividend Allowance, and Annual Exempt Amount are identical across all UK nations.

Tax on Bank Interest in the UK — 2025/26 Calculator

Savings interest tax calculator

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