What tax do you pay on your savings?

If you earn interest on your money, you may be wondering whether you need to worry about paying tax on savings. The good news is that many people in the UK pay no tax on their savings interest at all, thanks to a range of allowances and thresholds designed to keep smaller amounts tax-free.

Whether you’re a basic rate, higher rate or additional rate taxpayer, the amount of tax-free interest you may earn differs. This guide explains how savings tax works, how much interest you may keep tax-free and what steps (if any) you might need to take.

What is savings tax, and how does it work?

Savings tax is the tax paid on interest earned from your savings accounts and similar financial products. This interest is treated as taxable income and counts toward your total earnings for the year.

However, not all savings interest is automatically taxed. Thanks to allowances, such as the Personal Savings Allowance (PSA) and the start rate for savings, many people may earn a significant amount of interest before any tax becomes due.

The types of savings that can generate taxable interest include:

• Bank and building society savings accounts
• Government or corporate bonds

Good to know: Not all savings interest is taxed. Allowances mean many people, especially basic rate taxpayers, may owe nothing at all.

How much interest can you earn tax-free?

The amount of savings interest you may earn without paying tax depends on two main factors: your income tax band and whether you qualify for any additional allowances.

Personal Savings Allowance explained

The Personal Savings Allowance is the amount of savings interest you may earn each tax year without paying income tax on it. It was introduced in April 2016 and applies to most UK taxpayers.

The PSA you may receive depends on your income tax band:

*This includes the standard £12,570 Personal Allowance.

So if you're a basic rate taxpayer and earn £800 in savings interest during the tax year, you may owe no tax on it at all as it falls within your £1,000 allowance. If you're a higher rate taxpayer and earn £600, you'll have exceeded your £500 allowance and may owe tax on £100 of that interest.

Disclaimer: These figures are based on HMRC guidance in the UK at the time of writing and may be subject to change. Always check the latest information at GOV.UK.

Starting rate for savings

If your overall income is low, you may also qualify for the Starting Rate for Savings – an additional allowance on top of your PSA.

For the 2026/27 tax year, the starting rate for savings is up to £5,000 at 0% tax. This applies if your non-savings income (such as employment income or pension income) is below £17,570.

The allowance reduces by £1 for every £1 your non-savings income exceeds your Personal Allowance (12,570). So:

• If your non-savings income is £12,570 or less, you may be eligible for the full £5,000 starting rate.
• If your non-savings income is £17,570 or above, the starting rate is not available.

*Takeaway: Basic rate taxpayers can usually earn up to £1,000 in savings interest tax-free, while higher rate taxpayers can earn up to £500. Additional rate taxpayers do not get a Personal Savings Allowance. If your non-savings income is low, the starting rate could give you up to an extra £5,000 tax-free.

How much tax will you pay if you exceed your allowance?

If your savings interest exceeds your available allowances, you will pay income tax on the amount above the threshold. The rate you pay depends on your income tax band.

*Takeaway: If you go over your allowance, you pay 20% tax on the excess if you are a basic rate taxpayer, 40% if a higher rate, and 45% if an additional rate. Only the interest above your allowance is taxed, not all of it.

What's changing about savings tax?

From April 2027, the tax charged on savings interest will increase by 2% for people who pay tax on it.

New tax rates on savings interest from April 2027:

• Basic rate taxpayers: 22% (currently 20%)
• Higher rate taxpayers: 42% (currently 40%)
• Additional rate taxpayers: 47% (currently 45%)

When and how do you pay tax on savings?

For most people, HMRC handles everything automatically. If you're wondering when you pay tax on savings, it usually happens throughout the year via your tax code. If you're an employee, HMRC typically adjusts your PAYE code so that tax is collected from your wages.

HMRC receives information about you savings interest directly from banks and building societies. If you owe tax because you've exceeded your allowances, HMRC will typically adjust your tax code. This means the tax is collected in small amounts from your monthly pay or pension throughout the year.

When you may need to take action

You're likely to need to complete a self-assessment tax return if:

• Your total income from savings and investments is over £10,000
• You are already self-employed or complete Self Assessment for other reasons
• You receive a Simple Assessment letter from HMRC telling you that you owe tax that cannot be automatically taken out of your income

Step-by-step: what you may need to do

1. Check your total savings interest for the tax year. Banks usually provide an annual statement.
2. Compare this against your Personal Savings Allowance and any starting rate entitlement.
3. If your interest exceeds your allowance, check whether HMRC has adjusted your PAYE tax code.
4. If your savings interest is over £10,000, you must register for Self Assessment by 5 October following the end of the tax year.
5. Complete your tax return and pay any tax due by 31 January.

Good to know: Most basic rate taxpayers who stay within their PSA will not need to take any action. HMRC will handle any adjustments automatically.

How to reduce tax on your savings

There are several straightforward, tax-efficient options that may help you keep more of your savings interest.

Use an ISA

A Cash ISA (Individual Savings Account) allows you to save up to £20,000 per tax year and earn interest completely free of income tax. This doesn’t count towards your PSA.

Consider joint savings accounts

Savings in a joint account are typically treated as being owned equally. This means you both can use your own tax-free allowances toward the interest. It’s a smart way to manage your money, especially if one person has a higher Personal Savings Allowance than the other.

Spread savings across account types

Different account types offer different tax treatments. Mixing ISAs, regular savings accounts, and fixed-rate bonds strategically may help you manage how much taxable interest you earn in any given year.

Can you share or transfer your tax-free allowance?

You cannot transfer your Personal Savings Allowance to a partner or family member. Everyone gets their own allowance based on their income tax band. 
 
Couples can still reduce the amount of tax paid on savings in a few practical ways. For example, as we covered above, money held in a joint savings account usually means the interest is split equally between both account holders, allowing each person to use their own PSA against their share of the interest. 
 
There’s also the Marriage Allowance, which is separate from the PSA. If you’re married or in a civil partnership, the lower earner may be able to transfer £1,260 of their Personal Allowance to their partner. While this does not increase your savings allowance directly, it could reduce your household tax bill by up to £252 a year, which may help offset tax paid on savings interest. For more information, review HMRC’s latest guidance on GOV.UK. 

Takeaway: Your Personal Savings Allowance cannot be shared or transferred, but using savings accounts efficiently as a couple may help reduce the overall tax paid on interest.

Common mistakes to avoid

Savings tax is one of those areas where small misunderstandings can lead to unexpected bills or unnecessary worry. Here are some of the most frequent mistakes people make to help you navigate savings tax: 

How The AA could help

Now that you know how to make the most of your tax-free allowances, the next step is choosing the right place for your money to grow. At The AA, we offer simple, flexible accounts to help you reach your savings goals.

To be eligible for an AA savings account, you'll need to:

• Be a UK resident with a UK address
• Be aged 18 or over
• Have a UK mobile number
• Have UK tax residency only
• Have an open UK personal account that can be used as a nominated account

With our Easy Access Savings Account, you could start earning a return on your savings right away. Whether you’re just starting to use your Personal Savings Allowance or you're looking to switch for a better rate, we’ll guide you through every step to make the setup as smooth as possible.

FAQs

How much can I have in savings without getting taxed?

There’s no upper limit on how much you can hold in savings. The tax rules relate to the interest you earn, not the balance itself. Whether you owe tax depends on how much interest your savings generate and which allowances apply to you. 

As a basic rate taxpayer, you may earn up to £1,000 in savings interest tax-free (your PSA). If your non-savings income is also low, you may qualify for the starting rate for savings, potentially allowing up to £6,000 of interest tax-free. Higher-rate taxpayers have a £500 PSA, while additional-rate taxpayers have none.

Is there a tax "warning" for savings over £3,500?

You may have seen references to HMRC contacting people with significant savings balances. HMRC does receive data from banks and building societies, and may write to individuals it believes may owe tax on savings interest, particularly if their interest appears to exceed their Personal Savings Allowance. 

If you do receive a letter, there are a few steps you should take:

1. Verify the letter is genuine by checking this list of genuine HMRC contacts
2. Check the interest figure in the letter against your own bank statements
3. And don't panic – if the tax is genuinely owed, HMRC will usually explain how they plan to collect it (often through your tax code)

Which types of savings are always tax-free?

The following types of savings interest are tax-free in the UK:

• Cash ISAs: Interest is tax-free, regardless of how much you earn
• Stocks & Shares ISAs: These let you invest your money, and earnings are tax-free
• Lifetime ISAs: Earn tax-free interest and a 25% government cash bonus, subject to certain conditions and withdrawal rules

What should I do if I've overpaid tax on my interest?

If you believe you've paid too much tax on savings interest, you can claim a refund from HMRC. The most common reasons for overpayment include:

• Being tax at source before the PSA rules were applied
• Your tax code is incorrect
• Earning falling in a year where you were entitled to the starting rate for savings

To claim, you can contact HMRC, update your tax code via your Personal Tax Account on GOV.UK, or include the overpayment in a Self Assessment tax return if you file one. HMRC may also adjust future tax codes to account for any overpayment.