Do I Pay Tax on Savings Interest UK? (2026/27)

Yes — but only on interest above your Personal Savings Allowance (PSA). For 2026/27, the PSA is £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and £0 for additional-rate taxpayers. ISA interest is completely tax-free and doesn’t use the PSA. Premium Bonds prizes are also tax-free. Above the PSA, interest is taxed at your marginal income tax rate, collected via your tax code (PAYE) adjustment or Self Assessment.

This is the framework for 2026/27.

What counts as taxable savings interest

The PSA / income tax applies to interest from:

• Savings accounts (easy-access, fixed-rate bonds, notice accounts).
• Current account interest (most UK current accounts pay little but it counts).
• Regular saver accounts.
• Cash held in investment platforms (uninvested cash).
• NS&I Income Bonds, Direct Saver (taxable interest).
• Government bonds and corporate bonds (coupon interest).
• Peer-to-peer lending (outside an IFISA).

What’s NOT subject to PSA / income tax:

• ISA interest — tax-free under ISA rules.
• Premium Bonds prizes — tax-free under their own rules.
• Some NS&I products (specifically the children’s savings versions and certain bond types).
• Dividend income — uses separate £500 allowance.

How banks handle tax (and why it’s confusing)

Since April 2016, UK banks no longer deduct tax at source on interest paid:

• Interest is paid gross (full amount).
• You’re responsible for paying any tax owed via your tax code or Self Assessment.
• Banks report interest paid to HMRC annually.

Before 2016, basic-rate tax was deducted automatically by banks. Higher-rate taxpayers had to file Self Assessment to pay additional tax. The 2016 change moved everyone to the “gross interest” system.

The result: many savers now don’t realise interest may be taxable until HMRC catches up via tax code adjustments.

The PSA — how it works

The PSA is a tax-free allowance for non-ISA interest:

• Basic rate (20%): £1,000.
• Higher rate (40%): £500.
• Additional rate (45%): £0.

Above the PSA, interest is taxed at your marginal rate. The 0% band is sometimes called the “savings starting rate” for low earners — see below.

When do you actually have to pay tax?

For most people with modest savings, you don’t.

At 4.5% interest rates (typical for 2026/27):

• Basic-rate taxpayer fills £1,000 PSA at: £22,222 of savings.
• Higher-rate fills £500 PSA at: £11,111 of savings.
• Additional-rate has no PSA — every penny is taxable.

Below these break-even points, no tax is due. Above, the excess is taxed.

A worked example for a basic-rate taxpayer with £40,000 of cash savings at 4.5%:

• Annual interest: £1,800.
• PSA covers: £1,000.
• Taxable interest: £800.
• Tax at 20%: £160.

For higher-rate taxpayer with same £40,000 at 4.5%:

• Annual interest: £1,800.
• PSA covers: £500.
• Taxable interest: £1,300.
• Tax at 40%: £520.

How does HMRC collect the tax?

Two main routes:

Route 1: PAYE tax code adjustment

Most people with modest taxable interest:

• Banks report interest paid to HMRC.
• HMRC estimates your annual interest, adjusts your tax code.
• Adjusted code reduces your tax-free personal allowance by an estimated amount equal to the taxable interest.
• Your employer deducts more tax on each payslip.

For example, a £200 of estimated taxable interest:

• Your tax code might change from 1257L to 1237L.
• Effect: your personal allowance is reduced by £200 (£12,570 to £12,370).
• Result: £200 of salary now becomes taxable at 20% = £40 tax.

If the estimate matches your actual interest, you don’t owe more at year-end. If there’s a discrepancy, HMRC sends a P800 calculation.

Route 2: Self Assessment

If you’re registered for Self Assessment, you report interest on your return. The tax is calculated and paid by 31 January.

This is required if:

• You’re already filing for another reason (self-employment, rental income, etc.).
• Your savings interest pushes you over £10,000 (rare but specific HMRC trigger).
• Your tax position is complex enough that PAYE adjustment doesn’t work cleanly.

The starting rate for savings — for low earners

If your non-savings income is below £17,570 (personal allowance + starting rate band), you can also claim a separate starting rate for savings:

• £5,000 of savings interest tax-free.
• Separate from the PSA.

For someone with £8,000 salary and £6,000 interest:

• Salary £8,000 within personal allowance — no tax on salary.
• Remaining personal allowance: £12,570 − £8,000 = £4,570.
• £4,570 of interest covered by remaining personal allowance.
• Starting rate covers next £5,000.
• PSA covers next £1,000.
• Total tax-free interest: £4,570 + £5,000 + £1,000 = £10,570.
• Actual interest £6,000 — fully covered. No tax.

This benefit phases out as non-savings income increases. By the time you’re earning £17,570 from non-savings sources, the starting rate is gone.

Joint accounts

Interest from joint accounts is split equally between holders:

• Each holder uses their own PSA.
• Each is taxed at their own marginal rate.

For a couple holding £40,000 jointly at 4.5%:

• Total interest: £1,800.
• Each holder: £900.
• Both within PSA (assuming basic-rate taxpayers).
• No tax.

For one couple member at basic-rate and one at higher-rate:

• Each has £900 of interest.
• Basic-rate has £1,000 PSA → all £900 covered.
• Higher-rate has £500 PSA → £400 taxable.
• Tax for the higher-rate spouse: £160.
• Total household tax on interest: £160.

Foreign savings interest

Interest from foreign bank accounts:

• Taxable in the UK at your marginal rate.
• May also be taxed in the country where the bank is located.
• Double-tax treaties typically allow credit for foreign tax paid.

You report foreign interest on the Foreign Income supplementary page of Self Assessment.

A common scenario: UK resident with US bank account earning $500 interest:

• Taxable in the UK at marginal rate.
• US withholds some tax (often 0% under treaty for individuals).
• Report in UK, claim foreign tax credit if applicable.

How to minimise tax on savings interest

A few strategies:

1. Use the ISA wrapper

Every pound of ISA interest is tax-free. If you have meaningful savings and especially if you’re a higher-rate taxpayer, ISA usage is your first line of defense.

2. Use Premium Bonds for spillover

After filling your £20,000 ISA, Premium Bonds offer tax-free returns (via prize draw rather than guaranteed interest). The prize rate is competitive with savings rates, returns are variable.

3. Spread across spouse / civil partner

Use your spouse’s PSA too. Transfer some savings to their name (no tax implications between spouses) to use their tax-free allowance.

4. Time your interest

Fixed-rate bonds maturing in different tax years can spread the interest income — useful for staying within bands.

5. Consider pensions

If you’re aiming to use savings for retirement and you’re close to retirement age, contributing to a pension may be more tax-efficient than holding cash.

Worked example: tax planning for £100,000 of cash

Olivia is a higher-rate taxpayer with £100,000 of cash savings at 4.5%.

Without ISA:

• Annual interest: £4,500.
• PSA covers: £500.
• Taxable: £4,000.
• Tax at 40%: £1,600.

With ISA, current year:

• Move £20,000 to cash ISA.
• Non-ISA savings: £80,000.
• Non-ISA interest: £3,600.
• ISA interest: £900 (tax-free).
• PSA covers: £500.
• Taxable: £3,100.
• Tax at 40%: £1,240.

Year 2 onwards (filling £20k ISA each year):

• After 5 years, £100k+ all in ISA.
• All interest tax-free.
• Tax saved per year vs starting position: £1,600.

The cumulative benefit of ISA wrapping is substantial — particularly for higher-rate taxpayers.

Internal links

• How does the personal savings allowance work?
• Does an ISA count towards my personal savings allowance?
• How does premium bonds work and are they worth it?

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This guide is information, not regulated financial advice. Tax rules can change between budgets — confirm on gov.uk before acting.