If you earn interest on your savings, you may be wondering how much interest is tax free in the UK. Many savers assume that all interest earned from bank accounts is taxable, while others mistakenly believe they never have to pay tax on savings interest. The reality sits somewhere in between.
The amount of tax you pay depends on several factors, including your overall income, your tax band, and the tax-free allowances available during the tax year. Understanding these rules can help you avoid paying unnecessary tax and make the most of your savings.
This guide explains how savings interest is taxed in the UK, the allowances available, and when you may need to pay tax on interest earned from your savings.
What Is Savings Interest?
Savings interest is the money a bank, building society, or other financial institution pays you for keeping your money in a savings account. Although your savings themselves are not taxable, the interest generated from those savings may be subject to Income Tax if it exceeds the available allowances.
Most UK banks and building societies now pay interest gross, meaning no tax is deducted before the payment reaches your account. If you owe tax on that interest, HMRC will normally collect it later through your tax code or your Self Assessment tax return.
Several tax allowances determine whether your interest remains tax free, including:
- Personal Allowance
- Starting Rate for Savings
- Personal Savings Allowance (PSA)
Depending on your circumstances, you may not pay any tax at all on your savings interest.
Types of Income That Can Be Tax Free
HMRC provides a number of tax-free allowances that reduce the amount of Income Tax you pay. Besides savings interest, several other forms of income may also qualify for tax-free treatment, depending on your circumstances.
These include:
- Interest earned from savings accounts with banks and building societies
- Dividend income (within the applicable dividend allowance)
- Trading income covered by the £1,000 Trading Allowance
- Certain rental income, including relief available under the Rent a Room Scheme
- Interest earned within tax-efficient savings products such as Individual Savings Accounts (ISAs)
The exact amount you can receive tax free depends on your total taxable income during the tax year.
Personal Allowance
One of the first allowances to consider when calculating how much interest is tax free is your Personal Allowance.
For most taxpayers, the standard Personal Allowance allows you to earn up to £12,570 each tax year before paying Income Tax. If your total income, including savings interest, remains within this allowance, you generally will not pay tax.
The allowance may increase if you qualify for:
Your Personal Allowance gradually reduces once your annual income exceeds £100,000. It disappears entirely when your adjusted net income reaches £125,140, meaning all taxable income above this threshold becomes subject to the appropriate Income Tax rates.
If your savings interest falls within your unused Personal Allowance, it remains tax free.
Starting Rate for Savings
Some lower-income earners may also benefit from the Starting Rate for Savings.
This provides up to £5,000 of tax-free savings interest. However, the allowance is reduced by £1 for every £1 your non-savings income exceeds your Personal Allowance.
For example:
- Employment income: £15,000
- Savings interest: £100
- Total income: £15,100
After deducting the Personal Allowance of £12,570, your remaining taxable non-savings income is £2,430.
This reduces your £5,000 Starting Rate for Savings to £2,570, which still comfortably covers your £100 savings interest. As a result, no tax would be payable on the interest earned.
Once your non-savings income reaches approximately £17,570, the Starting Rate for Savings is usually reduced to zero.
Personal Savings Allowance (PSA)
The Personal Savings Allowance allows many taxpayers to receive a certain amount of savings interest without paying tax.
The allowance available depends on your Income Tax band.
| Taxpayer | Personal Savings Allowance |
|---|---|
| Basic-rate taxpayer | £1,000 |
| Higher-rate taxpayer | £500 |
| Additional-rate taxpayer | £0 |
For example, if you are a basic-rate taxpayer and your savings generate £800 of interest during the tax year, none of that interest will normally be taxable because it falls within your Personal Savings Allowance.
If your savings interest exceeds your allowance, only the amount above the allowance becomes taxable.
Which Savings Qualify for the Personal Savings Allowance?
The Personal Savings Allowance applies to interest received from many common savings products, including:
- Bank accounts
- Building society accounts
- Credit union savings accounts
- Government and corporate bonds
- Unit trusts and investment trusts
- Open-ended investment companies (OEICs)
- Peer-to-peer lending
- Some life insurance contracts
- Life annuity payments
- Certain trust funds
- Payment Protection Insurance (PPI) interest
Interest earned through Individual Savings Accounts (ISAs) and most National Savings & Investments (NS&I) tax-free products is already exempt from Income Tax, so the Personal Savings Allowance is not required for those accounts.
For joint savings accounts, HMRC generally treats the interest as belonging equally to each account holder unless evidence shows otherwise.
What Happens If Your Interest Exceeds the Tax-Free Allowance?
If your savings interest is higher than your available allowances, you may need to pay Income Tax on the excess amount.
In many situations, HMRC will automatically adjust your PAYE tax code to collect the additional tax. If you complete a Self Assessment tax return, you must declare your savings interest and calculate any tax due as part of your annual return.
The amount of tax payable depends on your Income Tax band and the level of interest received above your available allowances.
Tips to Reduce Tax on Savings Interest
There are several legitimate ways to reduce the amount of tax you pay on savings income.
These include:
- Maximising your annual ISA allowance.
- Splitting savings between spouses or civil partners where appropriate.
- Making full use of your Personal Savings Allowance.
- Considering National Savings & Investments tax-free products.
- Reviewing your overall income to determine whether you qualify for the Starting Rate for Savings.
Good tax planning can help you retain more of the interest you earn while remaining fully compliant with HMRC rules.
The Bottom Line
Knowing how much interest is tax free can help you make better financial decisions and avoid paying unnecessary tax on your savings.
Many people qualify for one or more tax-free allowances, including the Personal Allowance, the Starting Rate for Savings, and the Personal Savings Allowance. Together, these reliefs allow many UK taxpayers to receive hundreds or even thousands of pounds in savings interest without incurring Income Tax.
If your savings generate larger amounts of interest or your financial affairs are more complex, seeking professional tax advice can ensure you make full use of every available allowance while remaining compliant with HMRC requirements.
Disclaimer: All the information provided in this article on How much interest is tax free? including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.
