Last updated: 14 October 2026
Why has HMRC changed your tax code because of savings interest?
If your savings interest is above your tax-free allowances, HMRC can collect the tax through your PAYE tax code instead of asking you to file a return. Banks report the interest they pay to HMRC, which estimates your interest for the current year and reduces your tax-free allowance to match. For 2026/27, basic-rate taxpayers have a £1,000 Personal Savings Allowance, higher-rate taxpayers £500, and additional-rate taxpayers nothing.
How savings interest is taxed in 2026/27
| Allowance | Amount |
| Personal Savings Allowance, basic rate | £1,000 |
| Personal Savings Allowance, higher rate | £500 |
| Personal Savings Allowance, additional rate | £0 |
| Starting rate for savings | Up to £5,000, reduced by non-savings income over £12,570 |
| ISA interest | Always tax-free |
Savings income above the allowances is taxed at 20%, 40% or 45% in 2026/27. From 6 April 2027, the savings rates rise to 22%, 42% and 47%.
How the code changes
HMRC takes the interest it expects above your allowances and deducts it from your tax-free amount. For example, if HMRC expects £1,500 of taxable interest, it reduces your allowance by £1,500. A 1257L code might then become 1107L.
Example
Rachel earns £55,000, so she’s a higher-rate taxpayer with a £500 savings allowance. Her bank paid £2,000 interest last year. HMRC estimates the same this year, so £1,500 is taxable at 40%, which is £600. Her code drops from 1257L to 1107L, collecting the £600 through her pay over the year. If rates fall and she only earns £1,200 in interest, she can ask HMRC to update the estimate.
Check the estimate
HMRC’s estimate is based on last year’s figures. If you’ve moved money into an ISA, spent savings or rates have fallen, update the estimate in your personal tax account. Otherwise you’ll overpay and wait for a refund after the year ends.
When you need a Self Assessment return
If your savings and investment income is over £10,000, you must file a return. If it’s under that and you’re employed, HMRC usually collects through your code. Self-employed people include interest on their return.
Ways to reduce tax on interest
- Use ISAs: the overall limit is £20,000 a year. From April 2027, the cash ISA limit falls to £12,000 for under-65s
- Move savings to a spouse with a lower tax rate
- Consider Premium Bonds, where prizes are tax-free
- Use the starting rate if your other income is low
Pensioners and savings
If your only income is the State Pension and interest, HMRC may send a Simple Assessment letter instead of changing a code, because there is no PAYE to adjust. Check the figures against your bank statements and contact HMRC within 60 days if they are wrong.
Frequently asked questions
Is interest on joint accounts split?
Yes, usually 50:50 between the account holders.
Do fixed-term bonds count when paid?
Interest is usually taxed when it’s paid or credited.
Can I stop HMRC using my code?
You can choose to pay through Self Assessment instead.
Does the change affect National Insurance?
No, savings interest isn’t subject to NIC.
Related: paying tax on savings interest, using your cash ISA allowance and Personal Savings Allowance after redundancy.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with tax on savings interest. See our small business accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
