A Guide To Tax On Savings

3 piles of coins with wooden blocks on top spelling out the word tax

Whether you’re retired, employed or self-employed, understanding how your savings are taxed can help when it comes to financial planning.

In this guide, we’ll help you get a grip on how tax on savings works in the UK, and you’ll find answers to frequently asked questions.

What this guide covers:

What the Personal Savings Allowance is.
How much tax-free savings interest you can earn.
Tips to reduce tax on savings
What happens when you retire.

When do you pay tax on savings?

Whether you pay tax on your savings depends on:

Your income.
The type of savings account you use.
Any allowances you may have.

The main thing to understand is that you pay tax on any savings that go above a certain threshold. This threshold is called the Personal Savings Allowance. Your Personal Savings Allowance depends on how much taxable income you earn.

What is a Personal Savings Allowance?

The Personal Savings Allowance (PSA) is the amount of interest you can earn on your savings in a tax year without paying income tax. The tax year runs from 6th April to 5th April the following year.

Your PSA covers interest earned on all your savings accounts with all providers (excluding ISAs).

How much tax-free savings allowance you get depends on the rate of income tax you pay, which is based on your income. The HRMC website has details on Income Tax rates and Personal Allowances.

You’re likely to fall into one of three tax categories:

Tax rate	Taxable income	Personal Savings Allowance
Basic rate taxpayers (20%)	£12,571 - £50,270	Up to £1,000 per year
Higher rate taxpayers (40%)	£50,271 - £125,140	Up to £500 per year
Additional rate taxpayers (45%)	£125,140+	£0 - no Personal Savings Allowance

The starting rate for savings explained

The starting rate for savings is a tax-free allowance. Some people can get it on top of their Personal Savings Allowance. It’s there to help those who earn less.

If you earn less than £12,570 a year, you can get up to £5,000 in savings interest without paying any tax.

But for every £1 your income goes over £12,570, you lose £1 of this allowance. If you earn £17,570 or more, you won’t get any of the £5,000 starting rate.

Example: If you earn £14,570, that’s £2,000 over the £12,570 limit. So, your starting rate for savings would drop by £2,000. That means you’d get a £3,000 tax-free savings allowance.

How does the Personal Savings Allowance work for joint accounts?

If you have a joint savings account, the interest earned is split equally between both account holders.

Example: If you both pay the basic rate of tax and earn £2,000 in interest, each person gets £1,000. This matches each person’s full Personal Savings Allowance (PSA), so the whole £2,000 is tax-free.

The same rule applies if one person pays the basic rate and the other pays the higher rate.

In that case, the £2,000 interest is still split evenly. The basic rate taxpayer uses their full £1,000 PSA. The higher rate taxpayer uses their £500 PSA, but the extra £500 is taxed.

When do you start paying tax on savings?

You start paying tax on savings as soon as you go above your Personal Savings Allowance.

If you’re a basic rate taxpayer, you can earn up to £1,000 in savings interest tax-free. Anything above that is taxed.

If you’re an additional rate taxpayer, all your savings interest is taxed.

If you earn less than £18,570 a year (including your income and savings interest), you might not pay any tax on the interest earned on your savings. That’s because you’re eligible for three allowances, which are:

Personal Allowance (up to £12,570). This is how much you can earn before paying any income tax. It’s different from your PSA.
Starting savings rate (up to £5,000). If your total income is under £17,570, you can earn up to £5,000 in savings interest tax-free.
Personal Savings Allowance (up to £1,000). This is extra tax-free savings interest on top of the starting rate.

So, if you earn up to £12,570 a year, you could get both the starting savings rate and the PSA. That means you might earn up to £6,000 in savings interest without paying any tax.

How ISAs can help you save tax

ISAs are a simple way to save money without paying tax on the interest you earn. Each tax year, you can save up to £20,000 in ISAs, and all the interest is tax-free.

This ISA allowance is separate from your Personal Savings Allowance (PSA). Your PSA covers tax-free interest from regular savings accounts. Your ISA allowance only applies to money saved in ISAs.

Learn how to make the most of tax-free returns in our guide.

How to calculate if you owe tax on savings

To check if you owe tax on your savings, add up all the interest you've earned across your accounts for the tax year. Then compare this total to your allowances – the Personal Savings Allowance and, if eligible, the starting rate for savings. If your interest goes over these limits, you may need to pay tax.

You can learn more and apply for tax-free interest on GOV.UK, or use their online tool to see if you owe anything.

How do you pay tax on savings?

If you pay income tax through Pay As You Earn (PAYE), you don’t need to report savings interest yourself. HM Revenue & Customs (HMRC) automatically tracks the interest you earn. If you owe tax, they adjust your tax code to collect it.

This means your personal allowance (the amount you can earn before paying income tax) may be reduced in the next tax year. The change helps you pay back any tax owed on savings interest automatically.

If you’re self-employed, you must report savings interest when you complete your self-assessment and be sure to include interest from non-ISA accounts.

Tips to reduce tax on your savings

There are a few easy ways to cut down the amount of tax you pay on your savings. By using tax-free accounts and making the most of your allowances, you can keep more of your interest.

Here are some practical steps to help:

Use ISAs. You can save up to £20,000 each tax year in ISAs, and all interest earned is tax-free.
Split savings with your spouse or partner. If they pay less tax than you, moving some savings into a joint account can reduce the overall tax paid on interest.
Consider Premium Bonds. These don’t pay interest, but any prize money you win is tax-free.
Check if you qualify for the starting rate for savings. If your income is low, you might be able to earn up to £5,000 in savings interest tax-free, on top of your Personal Savings Allowance.

Do you need to tell HMRC about savings interest?

If you're self-employed, you must tell HMRC about any savings interest when you fill out your Self Assessment tax return.

If you're employed or receive a pension, you usually don’t need to do anything. Banks and building societies report your interest to HMRC at the end of the tax year. HMRC then updates your tax code, and any tax you owe is taken automatically through PAYE.

Paying tax on savings when retired

When you retire, tax on savings works the same as when you're working.

You still get a personal allowance of £12,570. If your pension income (including the State Pension) goes over this amount, you’ll pay tax on the extra. The amount of tax depends on your total income.

Usually, the first 25% of your pension is tax-free. The remaining 75% is taxed.

Your Personal Savings Allowance still applies in retirement. This gives you a tax-free amount for interest earned on savings. If you pay the basic rate of tax, you can earn up to £1,000 in interest without paying tax. If you pay the higher rate, the allowance is £500. If you pay the additional rate, there’s no allowance.