UK Tax on Savings Interest: Complete Guide 2026/27
How is savings interest taxed in 2026/27? Personal Savings Allowance £1,000/£500/£0, the £5,000 Starting Rate for Savings, ISA wrapper, Premium Bonds and a worked example showing exactly how much tax a basic-rate saver pays.
Why UK savers need to understand this now
With savings rates at 4–5% after years of near-zero rates, savings interest is no longer a trivial amount. A basic-rate taxpayer with £30,000 in a savings account at 4.5% earns £1,350 in interest — of which £350 now attracts 20% Income Tax.
Understanding the rules allows you to arrange your savings so that as little interest as possible is taxable — often saving hundreds of pounds a year with no financial sacrifice.
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Open Savings calculatorThe Personal Savings Allowance explained
The PSA was introduced in April 2016 and remains in place for 2026/27. It gives each taxpayer an annual allowance of tax-free savings interest:
| Tax band | PSA | Tax rate on interest above PSA |
|---|---|---|
| Basic rate (20%) | £1,000 | 20% |
| Higher rate (40%) | £500 | 40% |
| Additional rate (45%) | £0 | 45% |
"Savings interest" includes:
- Bank and building society interest
- Interest from peer-to-peer lending (above the PSA)
- Interest on corporate bonds (outside an ISA)
- NS&I account interest (not Premium Bond prizes)
- Interest on some life insurance products
It does not include: ISA interest, Premium Bond prizes, dividends (covered by the separate £500 dividend allowance).
The Starting Rate for Savings: a hidden allowance for lower earners
Fewer people know about the Starting Rate for Savings, which can shelter up to £5,000 of savings interest at a 0% rate. The catch: it is only available if your non-savings income is relatively low.
Here is how it works:
- Your non-savings income (salary, pension, rental) uses the Personal Allowance first (£12,570 in 2026/27).
- If non-savings income is below £17,570, the gap between £12,570 and £17,570 = up to £5,000 can be used by the Starting Rate for Savings at 0%.
- For every £1 of non-savings income above £12,570, you lose £1 of Starting Rate.
Example A: Retired on a State Pension of £12,533/year (£241.30/week × 52). Non-savings income is £12,533. Starting Rate available = £17,570 − £12,533 = £5,037. So up to £5,037 of bank interest at 0%, plus £1,000 PSA = total £6,037 tax-free savings interest.
Example B: Employed earning £30,000/year. Non-savings income of £30,000 is far above £17,570. Starting Rate = £0. Only the £1,000 PSA protects savings interest.
How HMRC collects tax on savings interest
Since April 2016, no tax is deducted at source from bank interest. You receive the full gross interest payment. HMRC collects any tax owed via one of two routes:
-
PAYE adjustment: HMRC estimates your savings interest (based on prior-year bank data it receives) and adjusts your PAYE tax code to collect the tax through your pay. You may notice your tax code changes after a year of higher interest earnings.
-
Self Assessment: if you are already registered for Self Assessment (self-employed, higher earner, landlord), you declare savings interest on your return and pay any tax due by 31 January after the tax year.
If your total interest is below your PSA plus any Starting Rate entitlement, you owe nothing and have nothing to declare.
Worked example: basic-rate taxpayer with £25,000 in savings
Sarah earns £30,000 salary, has no other income, and holds £25,000 in a Marcus savings account paying 4.5% AER.
Interest earned: £25,000 × 4.5% = £1,125
| Layer | Amount | Rate |
|---|---|---|
| Personal Savings Allowance | £1,000 | 0% |
| Taxable interest | £125 | 20% |
| Tax due | £25 |
Sarah pays just £25 in tax on £1,125 of interest. The effective tax rate on her savings return is only 2.2%. For her, the PSA provides excellent protection at current rates.
At what balance does Sarah start paying meaningful tax? If rates stay at 4.5%: £1,000 ÷ 4.5% = approximately £22,222 is the balance where interest exactly hits the £1,000 PSA. Above that, she pays 20% on the excess.
Worked example: higher-rate taxpayer with £50,000 in savings
James earns £65,000, pays 40% tax on income above £50,270. He has £50,000 in savings at 4.5%.
Interest earned: £50,000 × 4.5% = £2,250
| Layer | Amount | Rate |
|---|---|---|
| Personal Savings Allowance | £500 | 0% |
| Taxable interest | £1,750 | 40% |
| Tax due | £700 |
James pays £700 in tax. If instead he kept £20,000 in a cash ISA (interest tax-free) and only £30,000 in the taxable account:
- ISA interest: £20,000 × 4.5% = £900 (tax-free)
- Taxable interest: £30,000 × 4.5% = £1,350
- PSA covers £500, leaving £850 taxable at 40% = £340 tax
By splitting savings between ISA and taxable account, James saves £360/year in tax for no reduction in return.
ISA Calculator
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Model your ISA savings tax-free growthISA vs taxable savings: the long-term case
For anyone regularly earning interest above their PSA, a cash ISA or stocks and shares ISA protects every penny from tax. Unlike the PSA, which HMRC can change at any time, interest inside an ISA is protected by statute even if future governments tighten the rules.
The practical recommendation:
- Keep your emergency fund (3–6 months expenses) in the best-rate easy-access savings account.
- Once savings exceed the level where interest hits your PSA, start moving savings into a cash ISA.
- If you have longer-term savings goals (5+ years), a stocks and shares ISA typically outperforms cash over the long run.
Premium Bonds: the tax-free alternative
Premium Bonds are issued by NS&I. You do not earn interest — instead, your £1 bonds are entered into a monthly prize draw. The effective prize rate is currently around 4.40% per year (the "prize fund rate"), though individual returns vary.
Key point: prizes are entirely tax-free for every taxpayer, including additional-rate payers who have no PSA. This makes Premium Bonds especially valuable for higher earners with large cash savings.
Drawbacks: returns are probabilistic — you could win above the prize fund rate or well below it. Unlike a savings account, you do not receive a guaranteed return.
Checking your tax code for savings
If you are a PAYE employee and HMRC adjusts your tax code to collect savings interest, your code number will be lower. For example, instead of 1257L (standard 2026/27 code), you might see 1007L if HMRC is collecting tax on £250 of excess interest (£2,500 reduction in code × 10% = £250/10 per £1 of code).
Check your tax code via your Personal Tax Account at gov.uk if you think HMRC may have over- or under-collected.
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Frequently asked questions
How much savings interest can I earn tax-free in 2026/27?
It depends on your Income Tax band. Basic-rate (20%) taxpayers have a Personal Savings Allowance (PSA) of £1,000. Higher-rate (40%) taxpayers have a £500 PSA. Additional-rate (45%) taxpayers have no PSA at all. Interest within the PSA is tax-free regardless of how much you have in savings.
What is the Starting Rate for Savings?
If your non-savings income (salary, pension, rental income) is less than £17,570, you may benefit from a £5,000 Starting Rate for Savings at 0%. For every £1 of non-savings income above £12,570 (the Personal Allowance), you lose £1 of the Starting Rate. At £17,570 non-savings income the Starting Rate is fully used up.
Does my bank deduct tax from interest before paying me?
No. Since April 2016, UK banks and building societies pay savings interest gross — no tax is deducted at source. HMRC collects tax either through an adjusted PAYE tax code (for most employed savers) or via Self Assessment (if interest is above a certain threshold or you already file).
When do I need to declare savings interest on Self Assessment?
You should file a Self Assessment return (or inform HMRC) if your taxable savings interest exceeds the amount collectible through your tax code, or if your interest is significant enough that HMRC cannot adjust your code accurately. If all interest is within your PSA, you typically do not need to act.
Is ISA interest taxed?
No. Interest, dividends and capital gains inside an ISA are completely tax-free, regardless of the amount. The ISA wrapper effectively removes the investment from the UK tax system entirely.
Are Premium Bond prizes taxed?
No. Premium Bond prizes are not classified as savings interest — they are prize winnings and are completely tax-free for all taxpayers, at all income levels. You do not need to declare them on a tax return.
What about NS&I accounts — are they taxed the same way?
National Savings & Investment products like the NS&I Direct Saver and Income Bonds pay interest gross. The same PSA rules apply — the interest counts toward your allowance. NS&I Premium Bonds are the exception (prizes are tax-free).
How does HMRC know about my savings interest?
Banks and building societies are required to report customer interest to HMRC annually. HMRC cross-references this with your tax records. If interest pushes you over the PSA, HMRC typically adjusts your PAYE tax code to collect the tax in the following year.
Can I split savings between cash ISA and savings account to avoid tax?
Yes, this is a common and entirely legal strategy. Keep a portion of savings in a cash ISA (interest tax-free, no impact on PSA) and the remainder in a taxable savings account. Use the ISA to shelter interest above your PSA. The total ISA contribution limit is £20,000 per year.
What if I have a joint savings account?
Interest on a joint account is split 50/50 between account holders for tax purposes (unless you can demonstrate a different beneficial ownership split). Each person uses their own PSA against their share of the interest.
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