Tax on savings interest

The allowances that shelter your interest in 2026/27

Savings interest has three layers of protection before tax bites. The Personal Savings Allowance gives basic-rate taxpayers £1,000 of interest tax-free and higher-rate taxpayers £500; additional-rate taxpayers get nothing. Below £17,570 of income a separate starting rate can shelter up to £5,000 more. And anything inside a cash ISA never counts at all. On a £35,000 salary with £2,000 of interest, the first £1,000 is covered and the rest is taxed at 20%: a £200 bill. The same saver on £55,000 keeps only £500 of allowance and pays £600, which is the higher-rate double hit: a smaller shield and a bigger rate on what gets through. As one line: taxable interest = interest earned − your Personal Savings Allowance, charged at your income tax rate.

How the bill actually gets collected

Banks report interest to HMRC automatically, so nobody rings you: the tax usually arrives as a tweak to your PAYE code the following year, a small mystery on the payslip traced back to last year's savings account. Interest over £10,000 requires a Self Assessment return. Two quieter traps: interest counts as income when the £100,000 personal allowance taper is measured, and a fixed bond that pays all its interest at maturity can dump several years of interest into one tax year and blow through the allowance in a single hit.

Four wrong assumptions about savings tax

First, that the allowance applies per account. It is per person per tax year across everything you hold, so five accounts each earning £400 is £2,000 of interest set against one allowance, not five. Second, that the bank has already taken the tax off. Not since 2016: interest is paid gross now, and anything due gets settled through your tax code or a return, which is why the bill seems to arrive from nowhere a year later.

Third, that edging into higher rate only affects your salary. Crossing £50,270 halves the allowance to £500, so a £1 pay rise can put £200 of tax on interest you were already earning. Fourth, that a joint account belongs to whoever opened it. HMRC normally splits joint interest half each, which is either a nuisance or a free planning tool: a couple with one low earner can hold the savings in that name and use a whole extra allowance, possibly the £5,000 starting rate too.

When the ISA earns its keep

At current rates, around £20,000 of savings at 5% fills a basic-rate PSA, and £10,000 fills a higher-rate one. Beyond that point a cash ISA paying slightly less than a taxable account often wins after tax, and the £20,000 annual allowance resets every April. Savers with bigger balances or the itch to invest should weigh the investment calculator and the ISA vs pension comparison, and it's worth knowing the cash ISA rules change in April 2027, when under-65s will only be able to put £12,000 of the £20,000 into cash.