Savings Interest in the UK: How Much You'll Earn and When You Pay Tax

With savings rates well above where they were a few years ago, more people are earning meaningful interest again. That's good news, but it also means more savers are crossing the line where interest becomes taxable. This guide explains how savings interest is worked out, which allowances let you earn interest tax-free, and how to check whether you'll owe anything.

To see the figures for your own savings, try the savings interest calculator. It projects your balance and checks your first year's interest against your allowances.

How savings interest is calculated

Banks and building societies quote interest as an annual rate. Two numbers matter:

• AER (annual equivalent rate) shows what you'd earn over a year once interest is added and starts earning interest itself. It's the best figure for comparing accounts.
• Gross rate is the rate paid before any tax is taken off. For most UK savers, interest is paid gross because tax is no longer deducted automatically.

As a simple example, £10,000 in an account paying 4.25% AER would earn about £425 over a year if you leave the interest in the account.

Types of savings account

• Easy access accounts let you withdraw whenever you like. Rates can change at any time.
• Notice accounts require you to give notice, often 30 to 120 days, before withdrawing, usually in exchange for a higher rate.
• Fixed-rate bonds lock your money away for a set term, such as one or two years, at a guaranteed rate.
• Regular savers pay high rates but cap how much you can pay in each month.
• Cash ISAs can be any of the above, but the interest is tax-free.

The allowances that let you earn interest tax-free

Savings interest counts as taxable income, but there are three layers of protection that mean most people pay nothing.

1. Your personal allowance

If your total income is below the personal allowance of £12,570, you pay no income tax at all, including on interest.

2. The starting rate for savings

The starting rate for savings gives up to £5,000 of interest at 0% tax. It's reduced by £1 for every £1 of other income, such as wages or pension, above your personal allowance. So it helps people on lower incomes: once your other income reaches £17,570, it's gone.

3. The Personal Savings Allowance

The Personal Savings Allowance (PSA) lets you earn a set amount of interest each tax year tax-free, depending on your income tax band:

Interest from ISAs doesn't count towards the PSA, so you can earn as much as you like inside an ISA without using it up.

Working out whether you'll pay tax

Here's a worked example. Priya earns a salary of £60,000, which makes her a higher-rate taxpayer. She has £20,000 in a savings account paying 4.5%, earning about £900 in interest this year.

• Her Personal Savings Allowance is £500.
• £400 of her interest is above the allowance.
• That £400 is taxed at her marginal rate of 40%, so she owes £160.

If Priya were a basic-rate taxpayer, her allowance would be £1,000 and she'd owe nothing.

Rates on savings income

Interest above your allowances is taxed at your normal income tax rate: 20% for basic-rate, 40% for higher-rate and 45% for additional-rate taxpayers in the 2026/27 tax year. The government has announced that the tax rates on savings income will each rise by two percentage points from April 2027, so the value of tax-free wrappers such as ISAs is set to increase.

Scottish taxpayers pay Scottish rates on wages and pensions, but savings interest is taxed using the UK-wide bands and rates above.

How you pay any tax due

Banks report the interest they pay to HMRC. If you're employed or receive a pension, HMRC usually collects tax on interest by changing your tax code. If you already complete a Self Assessment tax return, you include your interest there. If neither applies and you owe tax, HMRC will normally send you a calculation after the end of the tax year.

It's worth checking your tax code and any calculation HMRC sends, as estimates are sometimes based on previous years' interest.

Ways to keep more of your interest

1. Use a cash ISA. You can pay up to £20,000 into ISAs in 2026/27, and the interest is tax-free.
2. Share savings with a spouse or partner. If one of you pays a lower rate of tax, holding savings in their name can mean more interest falls within an allowance.
3. Choose when interest is paid. On longer fixes, monthly or annual interest spreads it across tax years.
4. Consider premium bonds. Prizes are tax-free, though the effective return varies and isn't guaranteed.
5. Keep switching. Moving to the best rate available for your access needs is often worth more than any tax saving.

Is your money protected?

Deposits with UK-authorised banks and building societies are protected by the Financial Services Compensation Scheme (FSCS) up to £120,000 per person, per banking licence. Some brands share a licence, so check before you spread money across them.