How Savings Interest Is Taxed in the UK

Summary

Most people in the UK pay no tax on their savings interest thanks to the Personal Savings Allowance (PSA). Basic rate taxpayers can earn up to £1,000 in interest tax-free, higher rate taxpayers £500, and additional rate taxpayers get no allowance. Low earners may also benefit from the starting rate for savings, which provides up to £5,000 of additional tax-free savings income.

How it works

Savings interest is taxed as part of your income, but it “sits on top” of your non-savings income in the tax bands. Three allowances can shelter your interest from tax, applied in this order:

1. Personal Allowance (PA) — If your non-savings income is below £12,570, the unused portion shelters savings interest first.

2. Starting rate for savings — Up to £5,000 of savings income can be taxed at 0%. This is reduced pound-for-pound by non-savings income above the Personal Allowance. If your non-savings income is £17,570 or more, this rate is not available.

3. Personal Savings Allowance (PSA) — A nil rate band (0% tax) applied to the next portion of savings income:

Any savings interest remaining after these three allowances is taxed at your marginal rate: 20% (basic), 40% (higher), or 45% (additional).

ISA interest is always tax-free and does not count towards these limits.

The formula

Worked examples

Basic rate taxpayer

Low earner with starting rate

Inputs explained

• Annual income (before tax) — Your total non-savings income: salary, pension, rental income, self-employment. This determines your tax bracket, PSA amount, and how much starting rate is available.
• Annual savings interest — Total interest earned across all non-ISA savings accounts in the tax year. ISA interest should not be included — it is always tax-free.

Outputs explained

• Tax on savings interest — The total tax you owe on your savings interest after all allowances.
• Interest after tax — Your savings interest minus the tax due.
• Tax-free amount — How much of your interest is sheltered by the PA, starting rate, and PSA combined.
• Marginal rate — The tax rate that would apply to the next £1 of interest (0%, 20%, 40%, or 45%).
• Allowance breakdown — A visual bar showing how your interest is split between PA shelter, starting rate, PSA, and taxed portions.
• Tax-free headroom — How much more interest you could earn before any tax is due.

Assumptions & limitations

• Rates and thresholds are for the 2025/26 tax year (6 April 2025 – 5 April 2026). The same bands have been frozen since 2021/22 and are currently frozen through to 2030/31.
• The calculator assumes England, Wales, or Northern Ireland tax bands for PSA determination. Scottish taxpayers use Scottish income tax rates on employment income, but the PSA is based on the rest-of-UK bands.
• ISA interest is excluded — it is always tax-free and should not be entered as savings interest.
• The PA taper (£1 lost per £2 above £100,000) is modelled. At £125,140+, the Personal Allowance is zero.
• The calculator does not model jointly held accounts — each person’s share of interest should be entered separately.
• Dividend income is not included — it has its own allowance and rates.

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