Savings Income & Tax

What Counts as Savings Income for Tax Purposes

Savings income includes interest from:^[1]

Bank and building society accounts
National Savings & Investments (NS&I) products
Corporate and government bonds
Peer-to-peer lending platforms
Credit union accounts

Since April 2016, banks and building societies pay interest gross (without deducting tax). Any tax owed is collected separately.

The Personal Savings Allowance

The Personal Savings Allowance (PSA) lets you earn a certain amount of savings interest tax-free each year:^[1]

Tax Band	Tax-Free Savings Interest
Basic rate taxpayer	£1,000
Higher rate taxpayer	£500
Additional rate taxpayer	£0 (no allowance)

This means most people with modest savings pay no tax on their interest at all.

Starting Rate for Savings

There’s an additional £5,000 starting rate band for savings income, taxed at 0%. However, this is only available if your non-savings income (employment, self-employment, pensions) is below £17,570.^[3]

For every £1 of non-savings income above £12,570, the starting rate band reduces by £1. So if your other income exceeds £17,570, you get no benefit from this band.

ISAs: Completely Tax-Free

Individual Savings Accounts (ISAs) are the simplest way to earn savings income tax-free. Interest and gains within an ISA are completely exempt from Income Tax and Capital Gains Tax.^[2]

The annual ISA allowance is £20,000, which you can split across:

Cash ISA — savings interest tax-free
Stocks & Shares ISA — investment returns tax-free
Lifetime ISA — 25% government bonus for first home or retirement (age 18-39 to open)
Innovative Finance ISA — peer-to-peer lending tax-free

How Savings Tax Is Collected

If you owe tax on savings interest, HMRC collects it in one of two ways:^[1]

PAYE tax code adjustment — HMRC adjusts your tax code to collect the tax through your salary or pension. Banks report your interest to HMRC, and this is done automatically.
Self Assessment — if you file a return, you report savings interest there

When to File SA for Savings

You’ll need to file Self Assessment if your savings interest exceeds £10,000 before tax, or if your total untaxed income (including savings) exceeds £2,500.^[4] You can report savings interest free of charge with GoFile’s Income Tax software.

Frequently Asked Questions

How much savings interest can I earn tax-free?

Basic rate taxpayers can earn £1,000 of savings interest tax-free under the Personal Savings Allowance, higher rate taxpayers get £500, and additional rate taxpayers get no allowance.

Do I pay tax on ISA interest?

No. Interest and gains within an ISA are completely exempt from Income Tax and Capital Gains Tax. The annual ISA allowance is £20,000.

How is tax on savings interest collected?

Banks report your interest to HMRC, who either adjust your PAYE tax code to collect the tax through your salary or pension, or you report it on your Self Assessment return.

What is the starting rate for savings?

There is an additional £5,000 band taxed at 0% for savings income, but it is only available if your non-savings income (employment, self-employment, pensions) is below £17,570.

Sources

Tax on savings interest — GOV.UK
Individual Savings Accounts (ISAs) — GOV.UK
Income Tax rates and Personal Allowances — GOV.UK
Self Assessment tax returns — GOV.UK
Personal tax account — GOV.UK

Savings Income & the Personal Savings Allowance