For about a decade, tax on savings interest was a problem for other people. Rates were on the floor, the Personal Savings Allowance was generous relative to what anyone was earning, and you could hold a very large pile of cash without HMRC taking an interest.
That decade is over, and a lot of people have not updated. Interest rates are meaningfully higher than they were, the allowances have not moved, and the tax rate on savings income is going up. If you have a few tens of thousands in savings and you have never thought about this, it is worth twenty minutes.
Before we start. This is information, not advice, and nothing here is a recommendation to open, close or move any particular account. Rates change constantly and every figure is dated at the bottom.
The three things that decide whether you pay
There are three separate allowances, they stack, and almost everybody confuses them.
1. The Personal Allowance (£12,570). Your first £12,570 of income of any kind is untaxed. If your total income including interest is below this, you pay nothing.
2. The starting rate for savings (up to £5,000). If your non-savings income — salary, pension, self-employed profit — is low, you can earn up to a further £5,000 of savings interest at 0%. The catch is that this band shrinks pound for pound as your other income rises above the Personal Allowance, and it disappears entirely once your non-savings income reaches £17,570. So it is genuinely useful if you are retired on a small pension, on a low wage, or taking a career break. It is worth nothing at all to most people in full-time work.
3. The Personal Savings Allowance. This is the one most people mean when they say “the savings allowance”:
| Your tax band | Tax-free interest per year |
|---|---|
| Basic rate (20%) | £1,000 |
| Higher rate (40%) | £500 |
| Additional rate (45%) | £0 |
Note the third row. Additional-rate taxpayers get nothing — not a reduced allowance, nothing. Every pound of interest is taxable from the first pound.
The number that surprises people
The question is never “what is my allowance.” It is “how much can I hold before I breach it,” and the answer has moved a very long way in three years.
It depends entirely on your rate, so the useful thing here is not a number — it is the sum, which takes ten seconds and gives you an answer that is actually about you.
Divide your allowance by your interest rate, written as a decimal. £1,000 ÷ 0.045 is £22,222. That is the balance at which a basic-rate taxpayer on a 4.5% account starts paying tax on savings interest. Do the same with £500 if you are a higher-rate taxpayer.
Here is what that looks like across a plausible range, so you can see how fast it moves:
| Interest rate | Basic rate — tax starts above | Higher rate — tax starts above |
|---|---|---|
| 3.0% | £33,300 | £16,700 |
| 4.0% | £25,000 | £12,500 |
| 4.5% | £22,200 | £11,100 |
| 5.0% | £20,000 | £10,000 |
Read the higher-rate column again. Somewhere between ten and seventeen thousand pounds, depending on nothing more than the rate. That is not a wealthy person’s savings pot. That is an emergency fund. A great many people with a perfectly ordinary three-to-six-month buffer, a house deposit in progress, or a redundancy cushion are over that line and have never noticed.
Two things that will make your own answer different from the table. The first is the starting rate for savings, and it matters enormously to the people it applies to, so here is the sum in full rather than a pointer to it.
If your non-savings income — salary, pension, self-employed profit — is below £17,570, work out your starting-rate band as £5,000 minus however much your non-savings income exceeds the £12,570 Personal Allowance. Then add your Personal Savings Allowance on top, and divide that total by your rate.
Worked through: a retired reader with £13,000 of pension income is £430 over the Personal Allowance, so their starting-rate band is £5,000 − £430 = £4,570. Add the £1,000 Personal Savings Allowance and £5,570 of interest is tax-free. At 4%, that is a balance of about £139,000 before they pay a penny — against the £25,000 the table would have told them. If that is you, the table above is not merely imprecise, it is out by a factor of five, and using it could push you into a worse-paying ISA to avoid a tax you were never going to pay. And check whether your rate includes an introductory bonus. A great many of the accounts at the top of best-buy tables carry one for six or twelve months, and the underlying rate beneath it can be more than a percentage point lower. The rate that matters for this calculation is the one you will actually earn across the year, not the one on the marketing.
No rate in this article is a market quote and none of them is a recommendation. They are there to show you the shape of the arithmetic. The only rate that answers the question is the one on your own statement.
Where the mistake usually happens
“I haven’t had a bill, so I’m fine.” Banks report interest to HMRC automatically. If you are employed, HMRC typically collects the tax by adjusting your tax code — quietly, usually a year in arrears, sometimes wrong. A lot of people are paying savings tax right now through a code change they never read. Check your tax code, not your bank statement.
“It’s split across several accounts, so each one is under the limit.” The allowance applies to your total interest across all accounts, all banks, all products. Splitting money between accounts in your own name does nothing for tax except make it harder to add up.
It does something important for a different reason, though, and this article would be doing you a disservice not to say so: FSCS protection is £120,000 per person per banking authorisation, up from £85,000 since December 2025. Above that figure the protection simply stops, which is why savers with larger balances spread money across separate institutions.
Two things about that which catch people out. It is per banking licence, not per brand — and the trap is no longer just the obvious high-street pairings. A number of app-based savings providers are front ends riding on another bank’s licence, so two apps that look entirely unrelated can share one £120,000 limit. If you are anywhere near the figure, find out whose licence your money is actually sitting under. Do not assume the app will volunteer it: ask the provider directly, or look the firm up on the FCA Register, which is where the authorisation actually lives.
And if you are temporarily holding a very large balance for a specific reason — the sale of your main home, a redundancy payment, an inheritance — temporary high balance protection covers up to £1.4m for six months, which is precisely the situation this article’s own examples describe.
“Interest is only taxed when I withdraw it.” Interest is generally taxable in the year it is paid or credited, not when you spend it. The exception people get caught by is a multi-year fixed bond that pays all its interest at maturity — that can land as one large lump in a single tax year and push you over an allowance you would never have breached spreading it out. If you hold long fixes, look at when the interest is actually credited.
“I’m a basic-rate taxpayer so I’ve got £1,000.” Your band is determined by your total taxable income including the interest. Savings interest can be the thing that tips you from basic to higher rate — at which point your allowance halves from £1,000 to £500 in the same movement. If you are anywhere near £50,270 of total income, this is worth modelling rather than assuming.
And it gets more expensive in 2027
From 6 April 2027, the income tax rates that apply to savings income rise by two percentage points across the board. This is not a proposal — it is legislated, in section 5 of the Finance Act 2026:
| Band | Now | From April 2027 |
|---|---|---|
| Basic rate | 20% | 22% |
| Higher rate | 40% | 42% |
| Additional rate | 45% | 47% |
The allowances themselves are not changing. What changes is the price of breaching them. Take a higher-rate taxpayer with £30,000 in savings. At 5% that is £1,500 of interest, of which £1,000 is taxable — £400 today, £420 from April 2027. At 4% it is £1,200 of interest, £700 taxable, £280 today and £294 from 2027.
Modest in isolation. But it lands in the same window as the cash ISA limit falling to £12,000 for under-65s from April 2027, and those two changes point in the same direction: cash held outside an ISA is getting slightly more expensive to hold, and the ISA wrapper is getting slightly harder to fill with cash.
What you can actually do about it
Not advice — these are the mechanisms that exist. Which of them applies to you depends on facts about your situation that this article does not know.
The cash ISA wrapper exists for exactly this. Interest inside a cash ISA is not taxed and does not count towards your Personal Savings Allowance, so it does not eat into the allowance protecting your other accounts either. That second effect is the one people miss.
Check who holds the money in a couple. Allowances are individual. A couple where one is a higher-rate taxpayer and one is a basic-rate taxpayer has £1,500 of combined Personal Savings Allowance, but only if the balances sit in the right names. Moving money between spouses or civil partners does not itself trigger tax — provided it is an outright gift, meaning the money genuinely becomes theirs. Money moved into a spouse’s name while you keep control of it does not move the tax with it.
Look at when fixed-rate interest is credited, if you hold multi-year bonds, so you are not creating an artificial spike in one tax year. Worth saying plainly, since this article keeps pointing at them: a fixed-term bond locks your capital for the term and most will not let you withdraw early at all.
Check your tax code if you have savings above the breakeven numbers above. HMRC’s estimate of your interest is exactly that — an estimate, based on last year. If your balance or your rate has changed, the code is probably wrong in one direction or the other.
And the rate on the account itself is worth checking first. For a lot of savers the larger loss is not to tax at all. It is to a bonus rate that expired eleven months ago on an account opened in a branch in 2019. Tax optimisation on a 1.2% account is rearranging deckchairs.
The dutch uncle bit
There is a particular kind of person — and you may be one — who will read this, work out that they are paying a hundred and something a year of tax on savings interest, and feel obscurely cheated.
Try to hold onto the other half of that sentence. You are paying tax on savings interest because you have savings, and because those savings are earning something real for the first time since about 2009. That is a considerably better problem than the one most of this country had for the preceding decade.
Fix it if it is fixable. Do not let the irritation talk you into moving money somewhere unsuitable to avoid a bill smaller than the cost of moving it.
Figures used in this piece — and where they came from
| Figure | Value | Source | Verified |
|---|---|---|---|
| Personal Allowance 2026/27 | £12,570 | GOV.UK — Income Tax rates and Personal Allowances | 10 Aug 2026 |
| Basic rate band | £12,571–£50,270 (20%) | As above | 10 Aug 2026 |
| Higher rate band | £50,271–£125,140 (40%) | As above | 10 Aug 2026 |
| Additional rate | Over £125,140 (45%) | As above | 10 Aug 2026 |
| Personal Savings Allowance | £1,000 / £500 / £0 | GOV.UK — Tax on savings interest | 26 Aug 2026 |
| Starting rate for savings | Up to £5,000; tapers away by £17,570 of non-savings income | As above | 26 Aug 2026 |
| Savings income tax rates from 6 Apr 2027 | 22% / 42% / 47% — legislated, Finance Act 2026 s.5 | GOV.UK — Changes to tax rates for property, savings and dividend income; Commons Library CBP-10450 | 26 Aug 2026 |
| FSCS deposit protection | £120,000 per person per banking authorisation, from 1 Dec 2025 (was £85,000) | FSCS — deposit limit increase; PRA confirmation | 26 Aug 2026 |
| FSCS temporary high balances | Up to £1.4m for six months, raised from £1m on 1 Dec 2025 | FSCS — temporary high balances; PRA confirmation | 26 Aug 2026 |
| Cash ISA limit from Apr 2027 | £12,000 (under 65) | GOV.UK — ISA reform 2027 factsheet | 26 Aug 2026 |
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