Even though you have finally started to get some interest on your savings, it is unlikely that you will want to pay tax on it. The amount of interest you can earn tax-free before you have to start paying income tax on it depends on the amount of interest you receive from your other investments in addition to your savings account.
What The Personal Savings Allowance Actually Is
The Personal Savings Allowance (PSA) – How much can you earn tax-free? The PSA allows most people to receive interest from their savings without paying any tax on it. For the 2025/26 tax year, a basic-rate taxpayer can receive up to £1,000 of interest tax-free, a higher-rate taxpayer up to £500 of interest tax-free and an additional-rate taxpayer no tax-free interest.
Example One: The Low Earner Using The Starting Rate
Someone on £13,500, earning all of this from their salary, would have a Personal Allowance of £12,570. Therefore, the interest from their savings would be taxed on the £930 above the Personal Allowance, with the starting rate for savings applied up to the amount of £4,070 (reducing by £1 for every £1 of other income above Personal Allowance). So, in this example, none of the interest would be taxed.
Example Two: The Basic-Rate Saver
An example of a Basic-Rate Taxpayer would be someone on £30,000 per year. They have £1,400 in interest from their savings. The first £1,000 of their interest is tax-free under their Personal Savings Allowance. This means the remaining £400 is added to their income and taxed at 20% – here that would be £80 per year in tax, usually collected through PAYE and often without the taxpayer needing to complete a tax return.
Example Three: The Higher-Rate Saver
For example, someone on £60,000, a higher-rate taxpayer, gets a PSA of £500. So if they earn £800 interest from their savings, they get to keep the first £500 tax-free, and then the remaining £300 is taxed at 40% (or £120 in total). The more you earn, the smaller the proportion of your interest payments that you get to keep tax-free.
Additional-Rate Taxpayers Get Nothing
Additional rate taxpayers have a PSA of £0. Therefore all savings interest above ISA rates will be taxed at 45% on top of all other income. These individuals will not get the starting rate for savings either as they are a higher income individual.
How HMRC Actually Collects This Tax
Your bank or building society report interest on your savings to HMRC every year. If you’re an employee or a pensioner, this will be collected through an adjustment to your tax code for the following year. If you already complete a Self Assessment tax return, any tax on your savings will be included on that form instead.
ISA Interest Sits Outside All Of This
Interest on cash in ISA’s is however tax free, regardless of amount of return or other income. Therefore if you are nearing use of your PSA then ISAs should be considered as an alternative method of saving.
Working Out Your Real Return After Tax
5% as the interest (£900) is within their PSA allowance of £1,000 of interest. However, the interest above the taxpayer’s PSA will suffer the tax rate of 20% on the first part of the excess and 40% on the remainder. More on how much interest can i earn before paying tax can be found at https://inflationsaving.co.uk/finance/the-journey-a-rate-takes-before-it-reaches-you-and-what-gets-stolen-along-the/.
Tax-Free Interest At A Glance
Basic-rate taxpayer: £1,000 of interest tax-free each year.
Higher-rate taxpayer: £500 of interest tax-free each year.
Additional-rate taxpayer: £0, no allowance at all.
Starting rate for savings: The first £5,000 of savings income (in addition to PSA) is taxed at the starting rate for savings up to the amount of other income that is below £17,570, reduced by £1 for every £1 that other income exceeds the PSA of £12,570.
Any interest paid on and then withdrawn from cash ISA’s are not taken into account when calculating your PSA allowance for interest on savings held outside of ISA’s and when determining the rate of interest tax to pay.
Consider how your total annual income affects your overall savings tax allowance and calculate how this would apply to you.
