When interest on savings starts to be taxed

For years the interest on an easy-access account barely registered. A few pounds arrived each month, and nobody gave a thought to tax. Then rates climbed, the same balance started earning several hundred pounds a year, and some savers opened a letter from HMRC asking for tax on interest they had never been asked about before. Nothing about the rules had changed. The interest had simply grown large enough to pass the tax-free limits.

Two allowances, used in a set order

The first is the starting rate for savings. GOV.UK says that if your other taxable income, not counting savings interest or dividends, is less than £17,570, you can earn up to £5,000 of interest without paying tax on it. The £5,000 shrinks as other income rises: every £1 of other income above the £12,570 Personal Allowance reduces it by £1. At £17,570 it is gone.

The second is the Personal Savings Allowance. Its size depends on your Income Tax band:

• basic rate taxpayers: £1,000 of interest tax-free;
• higher rate taxpayers: £500;
• additional rate taxpayers: £0.

To work out which band you are in, GOV.UK says to add all your interest to your other income. Interest can therefore tip someone close to the £50,270 higher rate threshold into the higher band, which halves their allowance.

Nothing about the rules had changed. The interest had simply grown large enough to pass the tax-free limits.

How it plays out for three savers

Three savers with different incomes; the figures are invented.

Joanne’s other income is £2,430 above the Personal Allowance, leaving £2,570 of starting rate; her Personal Savings Allowance covers the remaining £430. Marcus pays 20% on £600. Fiona pays 40% on £1,100. Assumes no dividends and a standard Personal Allowance. Illustrative only.

Joanne’s case surprises people: on a modest wage, both allowances stack, so several thousand pounds of interest can be tax-free.

Why higher rates bring more savers into tax

The allowances are fixed in pounds, not as a share of savings, so the balance needed to use them up falls whenever interest rates rise. As a rough guide, at a 4% rate a balance of about £25,000 earns £1,000 a year, the whole basic rate allowance. A higher rate taxpayer reaches £500 with about £12,500. At 3% the same limits are reached at roughly £33,300 and £16,700.

Those numbers are arithmetic, not a forecast. A fixed-term bond that pays all its interest at maturity can push a single year over the limit even when the average across the term would not.

How HMRC finds out and collects the tax

Banks and building societies have paid interest without taking tax off since 6 April 2016. Instead, GOV.UK says, after the end of each tax year your bank or building society tells HMRC how much interest you earned. HMRC adds together interest from all your accounts. For joint accounts it splits the interest equally between the holders unless told otherwise.

What happens next depends on the amount:

• Interest of £10,000 or less. HMRC usually collects any tax through your tax code. If you have tax to pay, it sends a tax calculation, usually between June and the following March. If you have no tax code, or it cannot be changed, HMRC may send a Simple Assessment letter instead. If you already file Self Assessment, the interest goes on your return.
• Interest over £10,000. HMRC will send a notice to file a tax return, and anyone not already registered for Self Assessment needs to register.

Tax codes often include an estimate of this year’s interest, based on last year’s. If the estimate is wrong, GOV.UK says to contact HMRC to update it. Our guide to what the letters and numbers in your tax code are telling you explains how that adjustment appears. And if you owe tax but have not had a letter by 31 March after the tax year, GOV.UK says you must contact HMRC yourself.

The rate rise announced at the 2025 Budget

At the Budget on 26 November 2025 the government announced that savings income would be taxed at higher rates from April 2027. The Finance Act 2026 sets the savings rates for 2027/28 at:

• savings basic rate: 22% (from 20%);
• savings higher rate: 42% (from 40%);
• savings additional rate: 47% (from 45%).

HMRC’s technical note says these savings rates apply UK-wide, including Scotland, and that the starting rate for savings and the Personal Savings Allowance remain unchanged. The same Act freezes the £5,000 starting rate limit for the tax years 2026/27 to 2030/31. For 2026/27, the year that began on 6 April 2026, the old 20%, 40% and 45% savings rates still apply.

Interest that never counts

GOV.UK says you do not usually pay tax on interest from savings held in Individual Savings Accounts, and ISA interest does not use up either allowance. That is why ISAs tend to come up whenever higher rate taxpayers compare their interest with the £500 allowance. Our explainer on how much you can put into ISAs this year, and the different kinds covers the £20,000 limit and the cash ISA change due in April 2027. Dividends follow a separate set of rules, set out in when dividends need to be reported to HMRC.

Who this matters for, and what to check

• Savers with larger balances in fixed-rate bonds or easy-access accounts, especially higher rate taxpayers with a £500 allowance.
• People on low or part-time earnings, who may have the starting rate as well as the £1,000 allowance.
• Anyone whose income is near £50,270, where interest can change their band.
• Anyone with interest above £10,000, who will be in Self Assessment.
• Anyone with a tax calculation they think is wrong: querying it with HMRC is free.

What it adds up to

For 2026/27, a basic rate taxpayer can earn £1,000 of interest tax-free and a higher rate taxpayer £500, with up to £5,000 more for people on low other income. HMRC hears about interest from banks directly and usually collects any tax through the tax code. From April 2027 each savings rate rises by 2 percentage points, while the allowances and ISA treatment stay as they are.