Tax on savings explained - how much will you pay?

The tax rates on savings interest depend on how much earned income or other non-savings income you have, for example, rental income. If your taxable savings income falls within the basic rate band after this, and after the deduction of the income tax personal allowance if applicable (presently £12,570), as well as the relevant allowances described below, you will normally pay income tax at the rate of 20%. 

In the 2025/26 tax year, tax rates on income, including savings interest, are as follows: 

• The basic rate band is £37,700, which means broadly speaking you pay the 20% basic rate tax up to £50,270
• If your taxable interest falls between £50,271 and £125,139, you would pay the higher rate of 40%
• The additional rate of 45% is payable for savings interest above £125,140 

Please note that tax rates on dividends from shares are different, and if you are a Scottish taxpayer the rates and bands are different too. Follow the link to find out more about the UK tax brackets. 

How much interest on savings is tax free?

The ‘personal savings allowance’ introduced by the government in April 2016 means some people don’t pay tax on a limited amount of savings interest: 

• Basic rate taxpayers can earn £1,000 of interest in 2025/26 before paying tax
• Higher rate taxpayers have a lower allowance of £500
• Additional rate taxpayers don’t receive any personal savings allowance 

There is also an extra ‘starting rate’ for savings, which is a special 0% rate of income tax for savings income of up to £5,000 for those with taxable income below £17,570 in 2025/26. You’ll only get the full starting rate amount if your other income is up to the personal allowance of £12,570, but for many lower earners this increases how much they can keep in savings without paying tax.  

Tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future. If you are in any doubt, you should seek professional tax advice.

Who pays tax on savings when interest rates are high?

Given the complexity of the rules outlined above, as well as the fact that the tax bands and allowances are now frozen for longer, many savers with relatively modest amounts in bank and building society accounts are likely to pay tax on savings as higher interest rates increase income. 

By way of an example, you only need to have £25,000 in savings attracting an average rate of 4% to use up the personal savings allowance of £1,000 if you are a basic rate taxpayer. It’s another example of relentless ‘fiscal drag’, where higher inflation and earnings can cause more people to pay higher rates of tax. 

Sums required to use up personal savings allowance for a basic rate taxpayer assuming different rates of interest

Interest rate	Sums required
1%	£100,000
2%	£50,000
3%	£33,333
4%	£25,000
5%	£20,000
6%	£16,667

What else counts towards the personal savings allowance?

Individuals need to watch out as it is not just interest on savings that counts towards the personal savings allowance and, if applicable, the starting rate of savings. Income from certain investments do too including unit trusts and open-ended investment companies where income is classed as interest rather than dividends, government bonds (gilts), corporate bonds, purchased life annuities and some life insurance contracts. Add these to the equation and many unwitting investors are going to be potentially exceeding the modest savings allowance. 

However, savings and interest-bearing investments in tax-free accounts like Individual Savings Accounts (ISAs) and some National Savings and Investments accounts do not count towards the allowance. 

How to pay tax on savings

Some people do not realise that if your income from savings and investments is over £10,000 you automatically need to register for Self Assessment. Others will have to arrange to pay tax on their savings that fall outside of the various allowances. 

• If you’re employed or get a pension, HMRC will estimate how much interest you’ll get and change your tax code.
• If you’re self-employed and complete a Self Assessment tax return, you report any interest earned on savings on that.
• If you’re not employed, do not receive a pension and do not complete Self Assessment, your bank or building society will tell HMRC how much interest you received and HMRC will determine if you need to pay tax and how to pay it. 

Keeping tabs on your savings

Fortunately, there are ways to not only keep a good handle on the interest you are paid on your cash, but also maximise the rates you receive. Charles Stanley Direct Cash Savings offers access to a range of the banks and building societies to help our clients get the best deals quickly and easily through one online account. Every tax year you receive a clear breakdown of the interest income earned during the tax year, facilitating accurate reporting to HMRC on your assessment tax return. 

Choosing and switching cash accounts also couldn't be easier.

• Manage your savings in one place, moving between highly competitive accounts with ease
• Mix and match a range of terms from instant access to five years through one account
• A single application, identification check and log in
• Broad market coverage and some exclusive rates
• Financial Services Compensation Scheme (FSCS) protection for each banking partner of £85,000 per person
• Provided in conjunction with Bondsmith, a financial technology company authorised by the Financial Conduct Authority

Find out more