Tax on savings interest: how much you can earn tax free

Most people pay no tax on their savings, because a basic-rate taxpayer gets the first £1,000 of interest tax free and a higher-rate taxpayer the first £500. What matters is not how much you have saved but how much interest it throws off: at 4%, a basic-rate taxpayer can hold £25,000 before any of it is taxed, and at 2% that becomes £50,000. Above the allowance the excess is taxed at your normal rate, and HMRC usually takes it through your tax code rather than sending you a bill.

How much can you have in savings before you pay tax?

This is the question people actually ask, and the honest answer is that it depends on your interest rate as much as your balance. The allowance is fixed in pounds of interest, so the higher the rate, the smaller the balance that fills it. Find your rate and read across.

The balance at which a year of interest exactly fills the allowance. Above it, the excess is taxed. The Bank of England base rate is 3.75%, so the 3.75% row is the rough middle of the market rather than a best buy. To run your own balance and rate, use the savings calculator.

It is worth seeing why this changed. When savings paid 1%, a basic-rate taxpayer needed £100,000 before paying a penny, which almost nobody had in an easy-access account. At 4% the same allowance is filled by £25,000. The allowance did not change. The rates did, and that is why savers who never thought about this are now getting letters.

The three allowances that stack

There are three, they apply in order, and most confusion about this topic comes from mixing up the first and the third.

Your personal allowance is £12,570 and covers all your income. Your wages or pension use it first; if any is left over, it covers savings interest.

The starting rate for savings is a £5,000 band taxed at 0%, but only for people whose income outside savings is low. Every £1 of other income above the personal allowance takes £1 off it.

The Personal Savings Allowance is the one everybody has heard of: £1,000 at the basic rate, £500 at the higher rate, and nothing at all at the additional rate. It is not the same thing as your personal allowance, despite the similar name.

Stack all three and someone with no other income can receive £18,570 of interest without paying tax on any of it. Somebody whose pension exactly uses up their personal allowance can still take £6,000. Somebody on an ordinary salary gets £1,000, because the starting rate has already gone.

The starting rate for savings, in a table

This is the most misunderstood rule in UK personal tax, and it is really a simple subtraction. Take your income outside savings, subtract your personal allowance, and take that much off the £5,000. Here is the whole taper.

Income outside savings means wages, pension, rental and self-employment profit. It does not include savings interest or dividends.

The cut-off is £17,570, and above it the starting rate is gone completely. That is why this rule is, in practice, for three groups: someone living on a small pension, someone taking a career break, and someone living off their savings between jobs. A full-time worker on ordinary wages never touches it, which is why so few people have heard of it and why those who could use it often do not know it exists.

What £5,000 of interest actually costs

There is no single answer to this, which is exactly why it is worth a table. The same interest costs five different people five different amounts, and the spread is the entire point.

Two things worth drawing out. The person on a small pension pays £286, not nothing, because their starting rate has already been partly eaten. And the jump from a £30,000 salary to £60,000 more than doubles the bill, because crossing into the higher rate halves the allowance from £1,000 to £500 and taxes the remainder at 40% instead of 20%. It is a double hit, and it arrives at the same moment.

How HMRC finds out, and how it collects

You do not tell them. After the tax year ends, every bank and building society reports the interest it paid you. Interest has been paid gross, with no tax taken off at source, since 2016, so there is a gap between earning it and paying tax on it, and the reporting is what closes that gap.

If you are employed or drawing a pension, HMRC usually collects the tax by changing your tax code. Two things about that surprise people. The first is the lag: tax on interest earned in one year is typically collected through your code about two years later. The second is that the code change does two jobs at once, collecting what you owed for the earlier year and also carrying an estimate of what you will earn this year, which is why the adjustment often looks roughly double what you expected.

If you already file a Self Assessment return, report the interest there. And if your interest passes £10,000 you must file one, whether or not you did before. There is also a backstop worth knowing: if you have tax to pay and you have not had a letter by 31 March of the following tax year, you are expected to contact HMRC yourself.

Is a cash ISA worth it?

The usual advice stops at "ISA interest is tax free", which is true and not the decision. The real decision is that cash ISAs typically pay a bit less than the best taxable accounts, so you are trading rate for tax. Below the allowance the taxable account simply wins. Above it, there is a balance where the tax you pay outweighs the rate you gave up, and that balance is the answer.

The balance above which the ISA leaves you better off, on a steady balance held for a year. Below it the taxable account wins. "Never" means the ISA rate is too far below the taxable rate to catch up at any balance.

Read the first row and the pattern is clear. A basic-rate taxpayer choosing between 4.5% taxable and 4% in an ISA is better off taxable until roughly £50,000. A higher-rate taxpayer on the same two rates crosses over at about £15,385, because they keep only 60p of every taxed pound and their allowance is half the size. Higher-rate taxpayers reach the ISA case far sooner, on identical products.

Two things the arithmetic does not capture. An ISA keeps its tax shelter in later years, so if you expect to keep the money there while rates or your income rise, the crossover arrives sooner than a single-year sum suggests. And the £20,000 annual ISA limit is use-it-or-lose-it, which is a reason to start earlier than the break-even alone would say.

Fixed-rate bonds and which tax year the interest lands in

This is the trap that catches careful savers, and the rule behind it is published but almost never quoted. Interest counts as yours when it is received or made available to you. Not when it is earned, and not necessarily when it appears on a statement.

So the question for a fixed-rate bond is whether you could get at the money early. If the terms let you withdraw, even with a penalty, the interest arises each year as it is credited and is taxed year by year. If the terms do not let you touch it until maturity, the whole lot arises at maturity, and several years of interest land in a single tax year.

That is how somebody whose interest never came close to £1,000 in any year suddenly has a tax bill: a five-year bond maturing puts five years of interest into one. And you cannot spread it back over the years it accrued. The one thing worth doing is checking your bond's terms for early access, because that single line decides which of the two answers applies to you.

If you live in Scotland

Your wages are taxed on Scottish bands, which have more of them and different thresholds. Your savings interest is not. You pay the same tax on savings interest as the rest of the UK.

That is worth holding on to, because the obvious assumption is wrong in both directions. Being a Scottish intermediate-rate taxpayer does not mean your interest is taxed at 21%, and the Scottish thresholds are not what decides your savings position. For savings, the UK figures are the ones that matter.

Joint accounts and children's savings

Interest in a joint account is split equally between the account holders, and each half goes against that person's own allowance. For a couple that is two allowances rather than one, which is the simplest legitimate way for a household to double the interest it can take tax free. You cannot hold an ISA jointly, though, so that route is one account each.

Children's savings carry a rule that surprises almost everyone. If money a parent gave a child produces more than £100 of interest in a tax year, the interest is treated as the parent's income and taxed as theirs. Two details matter and both are commonly got wrong. It applies separately to each parent, so gifts from each get their own £100. And it is a cliff edge, not an allowance: at £105 of interest, the whole £105 becomes the parent's income, not the £5 above the line.

Money from grandparents and other people is outside the rule, and so are Junior ISAs and Child Trust Funds, where the £100 limit does not apply at all. Children have their own personal allowance like anyone else. If you are saving for a child, the Junior ISA guide covers the account that sidesteps this entirely.

For where a cash ISA fits against the rest of your allowance, see the ISA allowance explained and cash ISA vs stocks and shares ISA. To work out what your own balance actually earns, use the savings calculator.

Common questions

How much can I have in my savings account without paying tax?

That turns on your interest rate as much as your balance. At 4% a basic-rate taxpayer can hold £25,000 before the interest passes the £1,000 Personal Savings Allowance, and a higher-rate taxpayer £12,500. At 2% those become £50,000 and £25,000. The lower the rate, the more you can hold, which is why the answer moved so much when rates rose.

How much tax will I pay on £5,000 of savings interest?

Anywhere between nothing and £2,250, depending entirely on the rest of your income. With no other income at all you pay nothing, because the personal allowance and the starting rate for savings cover it. On a £15,000 pension it is £286. On a £30,000 salary it is £800. On £60,000 it is £1,800, because the allowance halves to £500 and the rest is taxed at 40%.

Do banks tell HMRC about my savings interest?

Yes, automatically. After the end of each tax year your bank or building society reports the interest it paid you to HMRC, under a long-standing reporting duty. You do not have to tell them separately, and you usually do not need to do anything at all unless your interest passes £10,000, which puts you into Self Assessment.

What happens if I earn more than £1,000 in interest?

The excess is taxed at your normal income tax rate, so 20%, 40% or 45%. If you are employed or drawing a pension, HMRC usually collects it by changing your tax code rather than sending a bill. That change does two things at once: it collects what you owed for a past year and it carries an estimate of what you will earn this year, which is why the adjustment often looks larger than people expect.

Is ISA interest counted towards my Personal Savings Allowance?

No. Interest on cash in an ISA is tax free and sits outside all of this, so it does not use up any of your allowance and you do not declare it even if you file a tax return. That is the whole argument for a cash ISA once your taxable interest is near the allowance.

Do I pay tax on savings interest if I live in Scotland?

You pay the same tax on savings interest as the rest of the UK, even though your wages are taxed on Scottish bands. That catches people out, because the Scottish band you sit in for your salary is not the band that decides your savings allowance.

How can I legally reduce the tax on my savings?

A cash ISA keeps the interest outside the calculation entirely. Beyond that: both partners have their own allowance, so holding savings in the name of the lower earner, or in a joint account where the interest is split equally, can use two allowances instead of one. Choosing a bond that pays out annually rather than at maturity can stop several years of interest landing in one tax year. Premium Bond prizes are not income for tax purposes.

Is this article financial advice?

No. It sets out the published 2026/27 allowances, rates and rules and shows what they come to, with every figure worked by our own tested engine. The figures are estimates to help you plan, not financial advice, and they assume a steady balance across the year. For a decision that matters, check with HMRC or a qualified adviser.

About this article

Written by the calcd team. We build UK money calculators and explain the numbers behind them in plain English. The allowances, rates and rules come from gov.uk and its income tax rates, the Scottish position from gov.uk on Scottish income tax, and the rule on when interest arises from HMRC's Savings and Investment Manual. Every figure on this page is computed at page load by our own tested engine, which is locked to gov.uk's worked example. Figures are estimates for the 2026/27 tax year and assume a steady balance across the year, not financial advice. Last updated September 2026.