How is the interest on a 2-year fixed-rate savings bond taxed in the UK?

Full answer

Fixed-rate savings bonds lock your money for a set term -- typically one to five years -- in exchange for a guaranteed interest rate. The tax treatment depends on when interest is credited and your overall income level. When is the interest taxed? HMRC taxes savings interest in the tax year it is "received" -- which usually means the year it is credited to your account or made available. If a bond credits interest annually (even while funds remain locked), you are taxed on it each year. If a bond rolls up and pays all interest at maturity, the entire lump sum is taxed in the year of maturity. Always check whether your bond pays annual or end-of-term interest. Personal Savings Allowance (PSA) In 2026/27 the PSA is: -- Basic-rate taxpayers (income up to GBP 50,270): GBP 1,000 tax-free -- Higher-rate taxpayers (income GBP 50,271 to GBP 125,140): GBP 500 tax-free -- Additional-rate taxpayers (above GBP 125,140): no PSA Interest within the PSA is not taxed. Only the amount above the allowance is subject to Income Tax at your marginal savings rate (20%, 40%, or 45%). Starting Rate for Savings If your non-savings income (salary, pension, rental) is below GBP 17,570, you may also qualify for the Starting Rate for Savings -- up to GBP 5,000 of savings income taxed at 0%. This is particularly useful for lower-income savers or retirees. ISA alternative Interest inside a Cash ISA (annual allowance GBP 20,000 in 2026/27) is always tax-free and does not use the PSA. A fixed-rate Cash ISA works identically to a standard bond but with no tax liability at any income level. Reporting the interest Banks and building societies report interest to HMRC automatically. If your total savings income (above the PSA) is less than GBP 10,000 and you are a PAYE employee, HMRC usually adjusts your tax code to collect the tax rather than requiring a Self Assessment return. If you are self-employed or earn above the threshold, declare the interest on your tax return in the year it arose. 2-year bond example You invest GBP 20,000 at 4.5% (GBP 900/year interest), paid at maturity. At maturity after two years, GBP 1,800 is credited. If you are a basic-rate taxpayer, GBP 1,000 is covered by the PSA and GBP 800 is taxed at 20% -- a GBP 160 bill. Splitting the bond term across two tax years (annual-interest version) could keep each year's interest within the PSA.

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