Do We Get Taxed On Savings Accounts?
- Adil Akhtar
- Feb 1, 2023
- 13 min read
Updated: Jun 24
Do You Really Have to Pay Tax on Your Savings?
Is Savings Interest Taxable in the UK?
Now, let’s get straight to it: yes, you might have to pay tax on the interest you earn from savings accounts in the UK, but it’s not as simple as a flat tax on every penny. The taxman—HMRC—only comes knocking if your interest exceeds certain allowances, like the Personal Savings Allowance (PSA) or the starting rate for savings. For the 2025/26 tax year, most basic-rate taxpayers can earn £1,000 in interest tax-free, while higher-rate taxpayers get £500. If you’re an additional-rate taxpayer, tough luck—you get nada. But there’s good news: some accounts, like ISAs, are completely tax-free, and low earners can bag up to £5,000 in tax-free interest. Let’s break this down.
What Counts as Taxable Savings Interest?
So, what exactly does HMRC consider taxable? It’s not just your bog-standard savings account. Interest from bank and building society accounts, fixed-rate bonds, credit union accounts, and even some investment trusts counts. For example, if you’ve got money in a corporate bond or a gilt (government bond), the interest portion is taxable. But here’s the kicker: interest from ISAs or certain National Savings and Investments (NS&I) products, like Premium Bonds, is tax-free. Interest is usually taxable when it’s credited to your account or becomes accessible, which can trip you up with fixed-term bonds where interest is paid at maturity. Always check your account terms to avoid surprises.
How Much Can You Earn Tax-Free in 2025/26?
Right, let’s talk numbers. The 2025/26 tax year has frozen thresholds (thanks, Budget 2021, extended to 2028), so more savers are getting taxed as interest rates climb. Here’s how it works:
Tax Band | Income Range (2025/26) | Personal Savings Allowance (PSA) | Starting Rate for Savings |
Personal Allowance | £0–£12,570 | N/A | £5,000 (if non-savings income < £12,570) |
Basic Rate (20%) | £12,571–£50,270 | £1,000 | £0–£5,000 (tapers with income) |
Higher Rate (40%) | £50,271–£125,140 | £500 | £0 |
Additional Rate (45%) | Over £125,140 | £0 | £0 |
Source: GOV.UK Income Tax Rates 2025/26
The starting rate for savings is a gem for low earners. If your total non-savings income (e.g., wages, pension) is below £17,570, you can earn up to £5,000 in savings interest at 0% tax. For every £1 of non-savings income over £12,570, you lose £1 of this allowance. Combine this with the PSA, and someone earning £13,000 from a job could have £5,570 tax-free interest (£4,570 starting rate + £1,000 PSA). Higher earners, though, rely solely on the PSA, which hasn’t budged since 2016 despite rising interest rates—ouch.
How Does HMRC Know About Your Interest?
Be careful! Your bank isn’t just paying you interest; it’s also snitching to HMRC. Every tax year (6 April to 5 April), banks and building societies report the interest they’ve paid you. HMRC uses this to check if you owe tax. If you’re employed or get a pension, they’ll tweak your tax code to collect any tax owed automatically through PAYE. For example, if you earned £1,200 in interest as a basic-rate taxpayer, you’d owe 20% tax on the £200 over your £1,000 PSA (£40). HMRC might lower your tax-free allowance to claw this back. If you’re self-employed or earn over £10,000 in savings interest, you’ll need to file a Self Assessment tax return. Miss this, and you could face penalties.
What Happens in Real Life?
Now, consider this: Idris, a Cardiff-based freelancer, has £30,000 in a savings account at 4% interest, earning £1,200 annually. As a basic-rate taxpayer (his freelance income is £40,000), his PSA is £1,000, so he owes 20% tax on the extra £200—£40. HMRC adjusts his tax code, so he pays this through his freelance income. But here’s where it gets tricky: if Idris’s income creeps over £50,270 next year, his PSA drops to £500, and he’d owe tax on £700 (£140 at 40%). This shows why tracking your total income is crucial, especially with frozen tax bands pushing more people into higher brackets.
Are Children’s Savings Taxed Differently?
Here’s a rare one: children’s savings accounts. Most kids don’t pay tax because their interest is below the £12,570 personal allowance. But if a parent gifts money to a child’s account and it generates over £100 in interest annually, that interest counts toward the parent’s PSA. For example, if little Alys’s account earns £150 from a £5,000 gift from Mum, Mum reports the £150 as her own interest. This rule stops parents using kids’ accounts as tax dodges. Grandparents’ gifts, though, don’t trigger this—handy to know!
Why Are More People Paying Tax Now?
Let’s be honest: higher interest rates are a double-edged sword. In 2023/24, HMRC estimated 2.7 million savers paid tax on interest, up from 1.8 million in 2022/23, thanks to rates hitting 5%+ on some accounts. With thresholds frozen, even modest savers are getting stung. For instance, £20,000 at 5% earns £1,000—enough to max out a basic-rate taxpayer’s PSA. This trend will likely continue into 2025/26 unless rates drop or thresholds rise (don’t hold your breath). Keeping tabs on your interest and exploring tax-free options is more important than ever.
How Can You Keep More of Your Savings Interest Tax-Free?
What’s the Smartest Way to Avoid Tax on Savings?
Now, nobody likes handing over their hard-earned cash to HMRC, so let’s dive into how you can legally keep more of your savings interest tax-free. Whether you’re a regular saver, a business owner, or someone with a tidy sum tucked away, there are strategies to dodge the taxman’s grasp. From maxing out ISAs to splitting interest with a partner, the key is planning ahead. For the 2025/26 tax year, with interest rates still hovering around 4–5% and tax thresholds frozen, these moves are more crucial than ever. Let’s explore some practical ways to make your savings work harder for you.
Why Are ISAs Your Best Friend for Tax-Free Savings?
Let’s be real: Individual Savings Accounts (ISAs) are the gold standard for tax-free savings. You can stash up to £20,000 per tax year (6 April to 5 April) across different ISA types, and every penny of interest, dividends, or capital gains is yours to keep, no questions asked. For 2025/26, the allowance stays at £20,000, unchanged since 2017. Here’s a quick rundown of your options:
ISA Type | What’s It For? | Key Features |
Cash ISA | Simple savings, like a regular account | Fixed or variable rates, easy access or locked |
Stocks & Shares ISA | Investing in shares, funds, or bonds | Potential for higher returns, but risky |
Lifetime ISA | First-time home buyers or retirement (age 18–39) | 25% government bonus (max £1,000/year) |
Innovative Finance ISA | Peer-to-peer lending or crowdfunding | Higher risk, less common |
Source: GOV.UK ISAs Overview
So, imagine this: Rhiannon, a Bristol-based nurse, puts £15,000 into a Cash ISA at 4.5%, earning £675 annually. That’s completely tax-free, no matter her income. If she’d used a regular savings account and earned £40,000 from her job (basic-rate taxpayer), she’d owe £40 tax on £200 of that interest after her £1,000 PSA. ISAs are a no-brainer for anyone nearing or exceeding their PSA. Just remember to shop around—some Cash ISAs offer measly rates compared to regular accounts.
Can Joint Accounts Double Your Tax-Free Allowance?
Here’s a clever trick: if you’re married or share finances with a partner, joint savings accounts can stretch your tax-free allowances further. In a joint account, HMRC splits the interest 50/50 between you for tax purposes, unless you notify them otherwise. This applies even if one partner contributes more. This means each of you can use your Personal Savings Allowance (PSA) against your share.
For example, let’s say Gethin and Sian, a couple from Swansea, have £50,000 in a joint account earning 4% interest (£2,000 annually). Each gets £1,000 credited toward their PSA. If they’re both basic-rate taxpayers, that’s £1,000 tax-free each, so the entire £2,000 is tax-free. Without a joint account, one of them holding £50,000 alone would owe tax on £1,000 (£200 at 20%). Just make sure both names are on the account, and check with your bank how they report interest to HMRC.
How Do Business Owners Handle Savings Tax?
Right, business owners, this one’s for you. If you’re running a limited company, any savings held in a business account (like a business savings account) are taxed differently. Interest earned counts as part of your company’s profits and is subject to Corporation Tax (19% for profits under £50,000, 25% for over £250,000, or a marginal rate in between for 2025/26). Unlike personal savings, there’s no PSA for companies.
For example, if Aled’s Cardiff-based tech firm has £100,000 in a business account at 3.5%, earning £3,500, the company pays 25% Corporation Tax (£875) if profits exceed £250,000. Sole traders or partners, though? Your savings interest is treated as personal income, so you get the PSA and starting rate for savings, but you’ll report it via Self Assessment. A smart move for business owners is to transfer surplus cash to a personal ISA to shield it from tax—up to £20,000 per year, of course.
How Do You Report Savings Interest to HMRC?
None of us is a tax expert, but reporting savings interest isn’t as daunting as it sounds. If you’re employed or get a pension, HMRC usually handles it by adjusting your tax code to collect tax on excess interest via PAYE. But if you’re self-employed, earn over £10,000 in savings interest, or have untaxed income, you’ll need to file a Self Assessment tax return by 31 January following the tax year (e.g., 31 January 2027 for 2025/26). Here’s a step-by-step guide to make it a breeze:
Check Your Interest: Banks send a Certificate of Interest (usually by May) or list it in online banking.
Calculate Taxable Amount: Subtract your PSA (£1,000 or £500) and any starting rate for savings.
Log In to HMRC: Use your Government Gateway ID on GOV.UK Self Assessment.
Fill the Savings Section: Enter interest in the “UK interest” box (SA100 form or online).
Submit by Deadline: File online by 31 January or paper by 31 October.
Pay Any Tax Owed: Due by 31 January, or set up a payment plan if needed.
If HMRC overtaxes you (e.g., wrong tax code), you can reclaim it using form R40 or via Self Assessment. For example, in 2023/24, Cerys from Newport was overtaxed £120 because her bank reported late, and HMRC assumed she’d earn more interest. She filed an R40 and got it back in six weeks.
What About Non-Domiciled Residents?
Here’s a rare scenario: if you’re a non-domiciled (non-dom) UK resident, your UK savings interest might be taxed differently. If you’re on the remittance basis (i.e., you only pay UK tax on foreign income brought into the UK), interest from UK accounts is taxable when earned, not remitted. For instance, Priya, a non-dom living in London, has £50,000 in a UK savings account earning £2,000 interest. As a higher-rate taxpayer, she owes 40% on £1,500 (£600) after her £500 PSA, even if she doesn’t touch the money. If you’re a non-dom, check with a tax advisor, as the rules are tricky and depend on your residency status.
Can You Reclaim Overpaid Tax on Savings?
Be careful! Overpaying tax on savings is more common than you’d think, especially if your income fluctuates or HMRC uses an outdated tax code. In 2024/25, HMRC refunded over £200 million to savers who overpaid, often because banks reported interest late or tax codes weren’t updated. If you’ve overpaid, you can claim a refund for up to four years back using form R40 (online or paper) or through Self Assessment.
For example, Dafydd, a retired teacher from Bangor, earned £10,000 from a pension and £800 in savings interest in 2023/24. He was entitled to the £5,000 starting rate for savings, but HMRC taxed him £160 via PAYE. He filed an R40 and got it back, plus £20 interest from HMRC. Always check your P60 or tax calculation letter to spot errors.
How Can You Plan Ahead for 2025/26?
So, the question is: how do you stay one step ahead? With interest rates high and thresholds frozen, proactive planning is key. Consider spreading savings across ISAs and joint accounts to maximize allowances. For business owners, weigh whether to keep surplus cash in the business or move it to personal ISAs. Monitor your total income—wages, pensions, and savings—to avoid slipping into a higher tax band. And don’t sleep on checking your tax code; a quick call to HMRC or a check on GOV.UK’s tax code tool can save you hassle. The more you plan, the less HMRC takes.
Your Quick Guide to Savings Tax in 2025
What Are the Key Points You Need to Know About Savings Tax?
Now, let’s wrap things up with a clear, no-nonsense summary of the most important things you need to know about tax on savings accounts in the UK for 2025/26. Whether you’re a taxpayer or a business owner, these points will help you stay on top of your savings and keep HMRC at bay. Each one is short, sharp, and packed with value to make sure you’re ready to make smart decisions.
Savings interest is taxable if it exceeds your Personal Savings Allowance (£1,000 for basic-rate, £500 for higher-rate, £0 for additional-rate taxpayers).
Low earners with non-savings income below £17,570 can get up to £5,000 tax-free interest via the starting rate for savings.
ISAs let you save up to £20,000 per year tax-free, covering cash, stocks and shares, or Lifetime ISAs.
Joint accounts split interest 50/50, doubling your PSA if both partners are basic-rate taxpayers.
Business savings accounts face Corporation Tax (19–25%) for limited companies, with no PSA.
HMRC collects tax via PAYE tax code adjustments or Self Assessment for self-employed or high savers.
Children’s savings from parental gifts over £100 in interest count toward the parent’s PSA.
Non-domiciled residents pay tax on UK savings interest when earned, not remitted, under the remittance basis.
Overpaid tax on savings can be reclaimed for up to four years using form R40 or Self Assessment.
Frozen tax thresholds and high interest rates mean more savers owe tax, so plan with ISAs and joint accounts.
FAQs
Q1: What happens if someone forgets to report savings interest on their Self Assessment?
A1: If someone forgets to report savings interest, they may face penalties from HMRC, typically a percentage of the unpaid tax, plus interest, depending on whether the omission was careless or deliberate.
Q2: Can savings interest push someone into a higher tax bracket?
A2: Yes, savings interest counts as taxable income and can push someone into a higher tax bracket if it increases their total income beyond the threshold, reducing their PSA.
Q3: Are fixed-rate bonds taxed differently from regular savings accounts?
A3: Fixed-rate bonds are taxed the same as regular savings accounts, with interest taxable when it’s paid or accessible, often at maturity, based on the PSA and tax band.
Q4: How does tax on savings work for non-residents with UK accounts?
A4: Non-residents may be exempt from UK tax on savings interest under double taxation agreements, but they must notify HMRC and may need to pay tax in their home country.
Q5: Can someone use their spouse’s ISA allowance to save tax?
A5: No, ISA allowances are individual and non-transferable, but couples can use joint accounts to split interest and maximize their combined PSA.
Q6: Is interest from NS&I Premium Bonds taxable?
A6: Interest from NS&I Premium Bonds is tax-free, as winnings are considered prizes, not interest, and are exempt from UK income tax.
Q7: How does HMRC calculate tax on savings interest paid monthly?
A7: HMRC taxes monthly interest as it’s credited, counting it toward the PSA for that tax year, with tax collected via PAYE or Self Assessment.
Q8: Can someone claim back tax on savings if they become unemployed?
A8: Yes, if unemployment reduces their income below £17,570, they may qualify for the starting rate for savings and can reclaim overpaid tax via form R40.
Q9: Are savings accounts held in trusts taxed differently?
A9: Savings interest in trusts is taxed at the trustee’s rate (up to 45%), with beneficiaries potentially liable for additional tax depending on their income.
Q10: Does the PSA apply to foreign savings accounts?
A10: The PSA applies to UK residents’ worldwide savings interest, but foreign accounts may also face local taxes, requiring double taxation relief claims.
Q11: Can someone split savings across multiple accounts to avoid tax?
A11: Splitting savings across accounts doesn’t increase the PSA, but it can help manage interest to stay within the allowance or use ISAs for tax-free growth.
Q12: What if someone’s bank reports incorrect interest to HMRC?
A12: If a bank reports incorrect interest, the individual should contact the bank for a corrected Certificate of Interest and inform HMRC to adjust their tax code or refund overpaid tax.
Q13: Are children’s ISAs tax-free like adult ISAs?
A13: Yes, Junior ISAs are tax-free up to the £9,000 annual allowance, and interest doesn’t count toward a parent’s PSA or the child’s personal allowance.
Q14: How does tax on savings work for pensioners?
A14: Pensioners get the same PSA and starting rate for savings, but low pension income may allow them to use the full £5,000 starting rate tax-free.
Q15: Can someone avoid tax by moving savings to an offshore account?
A15: UK residents must declare worldwide savings interest to HMRC, and offshore accounts don’t exempt tax, though double taxation agreements may reduce liability.
Q16: What happens if savings interest is paid after the tax year ends?
A16: Interest is taxed in the year it’s credited or accessible, so interest paid after 5 April counts toward the next tax year’s PSA and tax liability.
Q17: Do credit union savings accounts have different tax rules?
A17: Credit union savings are taxed like regular savings accounts, with interest counting toward the PSA and reported to HMRC for tax collection.
Q18: Can someone reclaim tax if they were incorrectly taxed as a higher-rate taxpayer?
A18: Yes, if incorrectly taxed as a higher-rate taxpayer, they can reclaim overpaid tax via form R40 or Self Assessment, proving their correct tax band.
Q19: Are savings certificates from NS&I tax-free?
A19: Certain NS&I savings certificates, like Fixed Interest or Index-Linked Savings Certificates, are tax-free, but individuals should check the specific product terms.
Q20: How does HMRC handle savings interest for deceased estates?
A20: Savings interest earned before death is taxed under the deceased’s PSA; after death, it’s taxed as part of the estate, often at the basic rate, until distribution.
About The Author:
Adil Akhtar, ACMA, CGMA, CEO and Chief Accountant of Pro Tax Accountant, is an esteemed tax blog writer with over 10 years of expertise in navigating complex tax matters. For more than three years, his insightful blogs have empowered UK taxpayers with clear, actionable advice. Leading Advantax Accountants as well, Adil blends technical prowess with a passion for demystifying finance, cementing his reputation as a trusted authority in tax education.
Email: adilacma@icloud.com
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