Tax on Savings Interest UK 2025
Understand how your savings interest is taxed in 2025/26, how much you can earn tax-free, and the most efficient ways to save.
Personal Savings Allowance 2025/26
The Personal Savings Allowance (PSA) is the amount of interest you can earn from savings without paying tax on it. It was introduced in April 2016 and has been a significant benefit for UK savers. The amount you receive depends on your income tax band:
| Taxpayer Band | Annual Income | Personal Savings Allowance |
|---|---|---|
| Non-taxpayer | Under £12,570 | Up to £5,000 (savings starter rate) + £1,000 PSA |
| Basic Rate (20%) | £12,571 – £50,270 | £1,000 |
| Higher Rate (40%) | £50,271 – £125,140 | £500 |
| Additional Rate (45%) | Over £125,140 | £0 |
Interest earned within your PSA is tax-free. Interest above your PSA is taxed at your marginal income tax rate — 20%, 40%, or 45% depending on your total income. You do not pay a special "savings tax rate" — it is the same rate as your income tax band.
The Savings Starter Rate Band
The savings starter rate is a less well-known but potentially very valuable allowance. If your non-savings income (salary, pension, self-employment profits) is below £17,570, you may benefit from a 0% tax rate on up to £5,000 of savings interest.
Here is how it works:
- Start with the savings starter rate band: £5,000
- For every £1 of non-savings income above the Personal Allowance (£12,570), reduce the starter rate band by £1
- If your non-savings income is £17,570 or above, the entire £5,000 band is used up and no starter rate benefit applies
Non-savings income above PA: £14,000 − £12,570 = £1,430
Remaining starter rate band: £5,000 − £1,430 = £3,570 at 0%
Remaining savings interest: £4,000 − £3,570 = £430
PSA applied: £430 is within her £1,000 PSA, so also 0%
Total savings tax owed: £0
Savings Interest Tax Calculator 2025/26
Enter your income and savings details to calculate tax on your interest.
What Counts as Savings Interest?
The following types of interest count towards your Personal Savings Allowance and are subject to the savings interest tax rules:
- Interest from bank and building society accounts (current, savings, fixed-rate bonds)
- Interest from NS&I accounts (Direct Saver, Income Bonds, Investment Account)
- Interest from peer-to-peer lending platforms
- Interest from corporate bonds and government gilts
- Interest from credit union accounts
- Interest from offshore accounts (must still be declared to HMRC)
The following are tax-free and do not count towards your PSA:
- Interest from ISA accounts (Cash ISA, Stocks & Shares ISA, Lifetime ISA)
- Premium Bond prize winnings from NS&I
- NS&I index-linked savings certificate returns
- Interest on overpaid income tax refunded by HMRC (repayment supplement)
How Banks Report Interest to HMRC
Since April 2016, banks and building societies no longer deduct tax from savings interest at source. Instead, they pay interest gross and report the full amount to HMRC through an annual information return.
HMRC receives this data automatically and can compare it against your tax records. If you owe tax on savings interest:
- PAYE taxpayers: HMRC adjusts your tax code to collect the tax owed through your next year's payroll. For example, if you owe £200 in savings tax, your personal allowance may be reduced by £1,000 (£200 ÷ 20%).
- Self-employed / Self Assessment filers: You declare savings interest on your Self Assessment return and pay the tax owed as part of your annual tax bill.
- High earners: If savings interest exceeds £10,000, HMRC requires you to complete a Self Assessment return.
ISA: The Tax-Free Alternative
An Individual Savings Account (ISA) is the most straightforward way to earn interest completely free of tax, with no limit on the interest amount. For 2025/26, you can save up to £20,000 per year in ISAs across all ISA types.
| ISA Type | Annual Limit | Tax Treatment |
|---|---|---|
| Cash ISA | Up to £20,000 | Interest tax-free |
| Stocks and Shares ISA | Up to £20,000 (combined) | Gains and income tax-free |
| Lifetime ISA | Up to £4,000 (within £20k) | 25% government bonus + tax-free growth |
| Innovative Finance ISA | Up to £20,000 (combined) | P2P interest tax-free |
| Junior ISA | Up to £9,000 (child) | Interest and growth tax-free |
Premium Bonds: Tax-Free Savings Alternative
Premium Bonds offered by NS&I are one of the most popular savings products in the UK, partly because prize winnings are completely tax-free and do not use any of your PSA. You can hold up to £50,000 in Premium Bonds. Instead of paying a fixed interest rate, you are entered into a monthly prize draw.
The tax-free nature makes Premium Bonds especially attractive for higher rate and additional rate taxpayers whose PSA is reduced or eliminated.
Scottish Taxpayers
If you are a Scottish taxpayer, your income tax rates differ from the rest of the UK. However, the Personal Savings Allowance is determined by your UK-wide taxpayer status, not your Scottish rate band. A Scottish intermediate rate taxpayer (21%) is still treated as a "basic rate taxpayer" for PSA purposes and receives the £1,000 allowance.
Frequently Asked Questions
How much savings interest can I earn tax-free in 2025?
In 2025/26, basic rate taxpayers can earn up to £1,000 in savings interest tax-free via the Personal Savings Allowance. Higher rate taxpayers (income over £50,270) receive £500. Additional rate taxpayers (income over £125,140) get no PSA. In addition, if your non-savings income is below £17,570, you may benefit from the 0% savings starter rate on up to £5,000. Interest in ISAs is always tax-free regardless of your income level.
What is the savings starter rate band?
The savings starter rate is a 0% tax rate on up to £5,000 of savings income. It is only available if your non-savings income (salary, pension, self-employment) is below £17,570. For each £1 of non-savings income above £12,570, the £5,000 band reduces by £1. This allowance is particularly valuable for people with small salaries and significant savings, such as retirees with low pension income.
Do banks automatically deduct tax from savings interest?
No. Since April 2016, UK banks and building societies pay savings interest gross without deducting tax. They report your interest directly to HMRC. HMRC then collects any tax due by adjusting your PAYE tax code for the following year, or through Self Assessment if you complete a return.
Are ISA savings tax-free?
Yes. Interest earned within an ISA is completely tax-free and does not count towards your Personal Savings Allowance. The annual ISA allowance is £20,000 for 2025/26. ISAs can hold cash, stocks and shares, peer-to-peer lending, and more. Once money is inside an ISA wrapper, it can grow and generate income without any UK tax liability.
How does HMRC collect tax on savings interest?
HMRC collects tax on savings interest primarily by adjusting your PAYE tax code if you are employed or receive a pension. For example, if you owe £400 in savings tax, HMRC may reduce your tax-free allowance by £2,000 (£400 ÷ 20%), resulting in more tax being deducted from your wages. If you complete Self Assessment, you declare the interest and pay the tax directly. If savings interest exceeds £10,000 in a year, HMRC requires a Self Assessment return.
Do Premium Bond prizes count as savings interest?
No. Premium Bond prizes are completely tax-free and do not count towards your Personal Savings Allowance. They are treated as lottery-style prizes rather than interest income. You can hold up to £50,000 in Premium Bonds. NS&I index-linked savings certificates are also tax-free in a similar way.