Tax on savings interest, explained simply
With interest rates higher than they were for years, a lot more people are earning enough savings interest to owe tax on it, often without realising. The good news is that two separate allowances mean most basic-rate taxpayers still pay nothing. Here's how it fits together.
The Personal Savings Allowance
The Personal Savings Allowance (PSA) lets you earn a chunk of interest tax-free each year. How much depends on your Income Tax band:
| Your highest tax band | Tax-free savings interest |
|---|---|
| Basic rate (20%) | £1,000 |
| Higher rate (40%) | £500 |
| Additional rate (45%) | £0 |
So a basic-rate taxpayer can earn £1,000 of interest before any tax is due. At today's rates that still takes a fair-sized balance, but it's no longer out of reach the way it was when rates were near zero.
The £5,000 starting rate for savings
There's a second, less well-known allowance on top: the starting rate for savings. This is a £5,000 band taxed at 0%, aimed at people with low earned income. The catch is that it's reduced by your non-savings income above the Personal Allowance. If your wages or profit already use up that £5,000 of room (roughly, income over £17,570), the starting rate gives you nothing. But if you have low earnings and high savings (say a semi-retired person living partly off interest), it can shelter a lot of interest from tax.
When interest is actually taxed
Above these allowances, savings interest is taxed at your normal Income Tax rate (20%, 40% or 45%) depending on the band it falls into. Interest sits below dividends but above your earned income in the stacking order, and an SA302 shows it on its own lines with the relevant allowance.
Do you need to report it?
Banks report the interest they pay you to HMRC. If you're employed and the amount is modest, HMRC may simply adjust your tax code to collect any tax due, without you filing anything. If you're already in Self Assessment, as most self-employed people are, you include your savings interest on your return, and it's taxed as part of the whole calculation.
ISAs stay outside all of this
Interest earned inside a cash ISA is tax-free and doesn't use up your Personal Savings Allowance at all. For people who regularly breach the PSA, moving savings into an ISA is the simplest way to keep the interest out of the tax net entirely.
Check the effect on your bill
Enter your savings interest alongside your other income in the estimator to see whether it tips you into a tax charge and how the allowances apply to your figures. For the wider picture, our guide on how the calculation works shows where savings sit in the order.