Check what a tax code means
Every UK tax code explained, with exact tax-free pay for each pay schedule.
Most savers in the United Kingdom pay no tax at all on their savings interest, because a basic rate taxpayer can earn £1,000 of interest tax-free through the Personal Savings Allowance, and a person on a low income can shelter up to a further £5,000 through the starting rate for savings [1]. On top of those two allowances sits the £12,570 Personal Allowance and the £20,000 ISA limit, which together mean the great majority of ordinary savers never see a tax bill on their interest [2].
Savings interest is not tax-free by default, though. It is income, and once it passes the allowances that apply to a particular saver it is taxed at that person's usual rate of Income Tax [1]. Whether any tax is actually due depends on how much other income the saver has, how much interest the accounts generate, and whether the money sits inside a tax-free wrapper such as an ISA.
This article sets out exactly when savings interest becomes taxable, how the Personal Savings Allowance, the starting rate for savings and the Personal Allowance stack on top of one another, which accounts are exempt, and how HM Revenue and Customs collects any tax that is owed. It also covers joint accounts, reclaiming tax paid in error, and the rate changes that take effect from 6 April 2027.
Key takeaways
- A basic rate taxpayer can earn £1,000 of savings interest tax-free, a higher rate taxpayer £500, and an additional rate taxpayer nothing, through the Personal Savings Allowance [1].
- A separate starting rate for savings shelters up to £5,000 of interest at 0% for people whose non-savings income is below £17,570 [3].
- Interest inside an ISA is completely tax-free and never counts towards any allowance, within the £20,000 annual limit [4].
- HMRC usually collects tax on savings by adjusting the tax code of an employee or pensioner, so no return is needed unless savings and investment income exceeds £10,000 [1].
- From 6 April 2027, the tax rates on savings income rise to 22%, 42% and 47%, though the allowances themselves are unchanged [5].
The three allowances that shelter savings interest
Before any tax is charged, a saver has up to three separate allowances working in their favour. They apply in a set order, and understanding that order explains why so few people pay tax on their interest.
The first is the Personal Allowance of £12,570, the tax-free slice that applies to almost all income [2]. If a saver has not used the whole Personal Allowance against wages, a pension or other income, the unused part can cover savings interest [1]. The second is the starting rate for savings, worth up to £5,000. The third is the Personal Savings Allowance, worth £1,000, £500 or nothing depending on the saver's tax band [1].
The table below shows how much tax-free headroom each allowance provides in the 2026-27 tax year.
| Allowance | Maximum value | Who benefits |
|---|---|---|
| Personal Allowance | £12,570 | Anyone, applied to all income including interest if unused [[2]](https://www.gov.uk/income-tax-rates) |
| Starting rate for savings | £5,000 | People with non-savings income below £17,570 [[3]](https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim1112) |
| Personal Savings Allowance | £1,000 / £500 / £0 | Basic / higher / additional rate taxpayers [[1]](https://www.gov.uk/apply-tax-free-interest-on-savings) |
The Personal Savings Allowance in detail
The Personal Savings Allowance, introduced in April 2016, is the reason most savers pay no tax on interest at all. A basic rate taxpayer receives £1,000 of savings interest at 0%, a higher rate taxpayer £500, and an additional rate taxpayer receives no allowance whatsoever [1]. To work out which band applies, a saver adds all their interest to their other income and checks where the total falls against the Income Tax bands [1].
The allowance is generous in practice. At a savings rate of 4%, a basic rate taxpayer would need around £25,000 in an ordinary account before the interest breached the £1,000 allowance, and a higher rate taxpayer around £12,500 before breaching £500 [1]. Because the allowance disappears entirely for additional rate taxpayers, the highest earners pay tax on every pound of interest earned outside a tax-free wrapper [2].
The starting rate for savings and its taper
The starting rate for savings is a separate 0% band worth up to £5,000, and it is aimed at people whose income comes mainly from savings rather than from work or a pension [3]. It reduces pound for pound as non-savings income rises above the Personal Allowance. Every £1 of wages or pension income above £12,570 cuts the starting rate by £1, and the band is extinguished once non-savings income reaches £17,570 [1].
A worked example makes this clear. A person with £16,000 of wages and £200 of interest first sets the £12,570 Personal Allowance against the wages. The remaining £3,430 of wages reduces the starting rate for savings from £5,000 to £1,570. Because the £200 of interest sits comfortably inside that £1,570, no tax is due [1]. The starting rate is most valuable to pensioners with modest pensions and larger cash balances, and to people who have retired early and live partly off savings [3].
When savings interest becomes taxable
Savings interest is taxed only when it exceeds the combined shelter of the allowances that apply to the individual. Once it does, the excess is taxed at the saver's normal rate of Income Tax, which for the 2026-27 tax year is 20% for a basic rate taxpayer, 40% for a higher rate taxpayer and 45% for an additional rate taxpayer [2]. Interest is treated as the top slice of income, sitting above earnings and pensions, so the rate charged depends on how much other income has already been used up [3].
The tax bands for the 2026-27 tax year, which set the rate applied to any taxable interest, are shown below.
| Income Tax band | Taxable income (above Personal Allowance) | Rate on savings interest |
|---|---|---|
| Basic rate | Up to £50,270 | 20% [[2]](https://www.gov.uk/income-tax-rates) |
| Higher rate | £50,270 to £125,140 | 40% [[2]](https://www.gov.uk/income-tax-rates) |
| Additional rate | Above £125,140 | 45% [[2]](https://www.gov.uk/income-tax-rates) |
Scotland sets its own Income Tax rates and bands on earnings, but savings interest is taxed on the UK-wide bands above, so a Scottish saver pays the same rate on interest as a saver elsewhere in the UK [2]. The devolved rates apply to non-savings, non-dividend income, not to savings [5].
Which types of interest count
The allowances cover most forms of interest, not only bank and building society accounts. Interest from savings and credit union accounts, unit trusts, investment trusts and open-ended investment companies, peer-to-peer lending, trust funds, payment protection insurance payouts, government or company bonds, and some life insurance contracts all count towards the allowance and are potentially taxable once it is used up [1]. Anyone unsure whether a particular product produces taxable interest should check the account terms, because the tax treatment follows the nature of the return, not the label on the account [6].
Sole traders and company directors who run their own payroll often hold business and personal savings side by side, and the personal interest is assessed on the individual in the normal way. A director drawing a low salary through sole-trader and single-director payroll and topping up with dividends will find that the low salary preserves more of the starting rate for savings, because it keeps non-savings income down [3].
Which accounts are exempt
Some savings are outside the tax net entirely and never count towards any allowance. Interest earned inside an Individual Savings Account is completely tax-free, as is the growth on certain National Savings and Investments products such as Premium Bonds [1]. Because ISA interest is ignored for tax purposes, it does not use up the Personal Savings Allowance, which leaves that allowance free to shelter interest from ordinary accounts [4].
ISAs, the tax-free wrapper
An ISA is the simplest way to keep savings out of the tax system altogether. In the 2026-27 tax year, an individual can pay in up to £20,000 across their ISAs, and all interest, dividends and capital growth inside the wrapper are free of Income Tax and Capital Gains Tax [4]. The £20,000 can be split across a cash ISA, a stocks and shares ISA, an innovative finance ISA and a Lifetime ISA in any combination the saver chooses [6].
The Lifetime ISA is a special case, with its own £4,000 annual limit sitting inside the overall £20,000, a 25% government bonus, and a withdrawal charge if the money is taken out before age 60 for any purpose other than a first home [7]. For most cash savers, though, the ordinary cash ISA remains the straightforward route to tax-free interest.
The ISA change from 6 April 2027
The overall ISA limit stays at £20,000, but the amount that can go into a cash ISA is changing. From 6 April 2027, the annual cash ISA subscription limit will be set at £12,000 for savers under the age of 65, within the unchanged £20,000 overall limit [5]. Savers aged 65 and over will keep the ability to put the full £20,000 into a cash ISA each year [8]. The reform is designed to nudge younger savers towards stocks and shares ISAs, and it does not change the tax-free status of anything already held in a cash ISA [8].
How HMRC collects tax on savings
A saver who owes tax on interest rarely has to do anything to pay it, because HMRC has a system for collecting the money automatically. Banks and building societies report the interest they have paid to each customer at the end of every tax year, and HMRC uses that information to work out whether tax is due [1]. How the tax is then collected depends on the saver's circumstances.
The three routes HMRC uses are summarised below.
| Situation | How tax is collected | What the saver does |
|---|---|---|
| Employed or receiving a pension | HMRC changes the tax code | Nothing, unless the estimate looks wrong [[1]](https://www.gov.uk/apply-tax-free-interest-on-savings) |
| Completes Self Assessment | Report interest on the tax return | Include savings interest in the return [[9]](https://www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return) |
| Not employed, no pension, no return | HMRC writes to explain how to pay | Follow the instructions in the letter [[1]](https://www.gov.uk/apply-tax-free-interest-on-savings) |
The tax code route
For an employee or a pensioner, HMRC usually collects tax on savings by adjusting the tax code so that a little extra tax comes out of wages or pension each month [1]. HMRC estimates the current year's interest by looking at what the saver received the previous year, then builds that estimate into the code [10]. Because the collection happens through the tax code, anyone who wants to see how a coding change affects their take-home pay can model it with the Moonworkers tax code checker, which applies the current PAYE rules to any code.
If the estimate is wrong, HMRC issues a tax calculation letter, known as a P800, showing an overpayment or underpayment, and these are sent out between June and March of the following tax year [10]. A saver who has clearly gone over the allowance but has not received a letter by 31 March of the following tax year should contact HMRC promptly to avoid a penalty [1].
Work out how a tax code change affects take-home pay
When HMRC collects savings tax through a tax code, the change flows straight into a payslip, and it can be hard to see the effect without running the numbers. The Moonworkers tax code checker decodes any tax code and shows the tax it produces under the 2026-27 rules, which helps a saver confirm that a coding adjustment for savings looks right.
On your payslip, P45 or P60. Suffixes W1, M1 or X welcome.
What you'll get
Enter any UK tax code to see:
- · what each letter and number means
- · which nation's rates apply (S and C prefixes)
- · cumulative vs emergency W1/M1 basis
- · the exact tax-free pay for every pay schedule, to the penny
Try 1257L, a K code, or an emergency W1 code.
Payroll that applies every tax code correctly
Moonworkers runs the full HMRC exact percentage method on every payslip, including K codes, emergency codes and in-year code changes, and files RTI automatically.
The Self Assessment route
Some savers have to report interest through a Self Assessment tax return rather than through a tax code. Registration for Self Assessment is required where income from savings and investments exceeds £10,000 in a tax year, and anyone who is unsure should use HMRC's online checker to confirm whether a return is needed [11]. A self-employed person who already files a return simply reports the interest in the relevant box, alongside their trading profit [9]. Sole traders who need to understand the wider return can read the Moonworkers guide to paying tax when self-employed, which sets the interest question in the context of the full Self Assessment process.
Joint accounts and reclaiming tax
Interest on a joint account is split equally between the account holders for tax purposes, so a couple with a joint savings account are each treated as receiving half the interest against their own allowances [1]. Where the true ownership is unequal, the couple can tell HMRC to split the interest differently to match the real position [1]. This matters when one partner is a higher rate taxpayer and the other has spare allowance, because moving more of the interest to the lower earner can reduce the household tax bill.
A saver who has paid tax on interest that turned out to be within an allowance can reclaim it, provided the claim is made within four years of the end of the relevant tax year [1]. Someone who files a Self Assessment return claims the refund through the return, while a saver who does not file uses form R40 to reclaim tax deducted from savings and investments [12]. Keeping annual interest certificates from each bank makes any reclaim far simpler, because HMRC will want to see the figures behind the claim [12].
The savings rate change from 6 April 2027
The allowances are staying the same, but the rates charged on interest above them are set to rise. At Budget 2025 the government announced that from 6 April 2027 the tax rates on savings income will increase to 22% at the basic rate, 42% at the higher rate and 47% at the additional rate, up two percentage points from the current 20%, 40% and 45% [5]. The stated aim is to narrow the gap between tax on income from work and tax on income from assets, because savings interest does not attract National Insurance [5].
The starting rate for savings and the Personal Savings Allowance both survive the change unchanged, so the number of savers who pay any tax at all will not jump [5]. For those who do pay, though, the bill on interest above the allowances will be higher from that date. The change strengthens the case for using the ISA wrapper, since interest inside an ISA is untouched by the new rates [4]. Employers and payroll teams who collect savings tax through coding notices will see HMRC apply the new rates automatically once they take effect [5].
Understanding the difference between how interest is taxed and how earnings are taxed is useful for anyone weighing salary against savings, and the Moonworkers guide to how much a person can earn before paying tax sets out the earnings side of that picture. For payroll operators, the point to hold onto is that savings tax is a personal liability collected around the edges of the PAYE system, not a payroll deduction in its own right, which is why an accurate tax code matters so much when running SME payroll.
Conclusion
For the ordinary saver, the honest answer to whether tax is due on UK savings is usually no. The Personal Allowance, the starting rate for savings and the Personal Savings Allowance stack up to shelter thousands of pounds of interest, and the ISA wrapper removes another £20,000 of savings from the tax net every year. Tax bites only when interest outside an ISA runs past the allowances that apply to a particular person, and even then HMRC tends to collect it quietly through a tax code rather than a demand.
The picture is not static. Rates on savings income rise from 6 April 2027, and the cash ISA limit for younger savers tightens on the same date, which makes the tax-free wrapper more valuable than ever. A saver who keeps interest certificates, checks that any tax code adjustment looks right, and uses the ISA allowance before it is lost will keep more of what their savings earn, whatever the headline rate does next.
FAQs
How much can I have in savings before I pay tax in the UK?
There is no single savings balance that triggers tax, because the tax depends on the interest earned, not the amount held. A basic rate taxpayer can earn £1,000 of interest tax-free through the Personal Savings Allowance, and someone on a low income can shelter up to a further £5,000 through the starting rate for savings [1]. At a 4% return, a basic rate taxpayer would need roughly £25,000 in an ordinary account before the interest passed the £1,000 allowance, and anything held in an ISA is tax-free regardless of the balance [4].
Do banks automatically deduct tax from savings interest?
No. UK banks and building societies pay interest without deducting tax at source, a system that has applied since April 2016 [1]. Instead, they report the interest paid to each customer to HMRC at the end of the tax year, and HMRC works out whether tax is due [1]. If tax is owed, HMRC usually collects it by changing the saver's tax code rather than asking the bank to withhold it [10].
Do I need to tell HMRC about my savings interest?
Most savers do not need to, because HMRC receives the figures directly from banks and building societies and adjusts the tax code where necessary [1]. A person must register for Self Assessment, and therefore report the interest themselves, if income from savings and investments exceeds £10,000 in the tax year [11]. Anyone who has clearly exceeded the allowance but has not heard from HMRC by 31 March of the following tax year should get in touch to avoid a penalty [1].
Is interest earned in an ISA tax-free?
Yes. All interest, dividends and capital growth earned inside an ISA are free of Income Tax and Capital Gains Tax, within the £20,000 annual subscription limit for the 2026-27 tax year [4]. ISA interest also does not count towards the Personal Savings Allowance, which leaves that allowance free to cover interest from ordinary accounts [1]. From 6 April 2027, the amount that can be paid into a cash ISA each year falls to £12,000 for savers under 65, though the overall ISA limit stays at £20,000 [5].
image_prompt: "Documentary-style wide shot, a person in their fifties at a home desk reviewing a bank savings statement beside an open laptop, warm afternoon light through a net curtain, muted palette of warm grey, teal and paper white, a modest suburban British living room behind, off-centre composition with the subject in the left third, shot on a Leica Q3 at 28mm f/2.8, photojournalism, 35mm film grain, no AI artefacts, no warped hands, no warped text, landscape orientation 16:9."
