Bank Interest Tax UK: Personal Savings Allowance Explained
Introduction
Interest earned on savings accounts, bonds, and other deposits is taxable income in the UK. However, the Personal Savings Allowance (PSA) means most people pay no tax on their savings interest.
This guide explains how savings interest is taxed, who needs to pay, and how to report it on your Self Assessment return.
How Savings Interest Is Taxed
Interest from UK banks and building societies is paid gross (without tax deducted). You are responsible for paying any tax due.
Savings interest is added to your other income and taxed at your marginal Income Tax rate. However, the Personal Savings Allowance provides tax-free interest for most savers.
The Personal Savings Allowance (PSA)
The PSA allows you to earn a certain amount of savings interest tax-free each year.
PSA amounts for 2025/26
| Tax band | Personal Savings Allowance |
|---|---|
| Basic rate taxpayer | £1,000 |
| Higher rate taxpayer | £500 |
| Additional rate taxpayer | £0 |
How it works
- Interest up to your PSA is tax-free
- Only interest above your PSA is taxed
- Your PSA depends on your total taxable income, not just your savings
Examples
Basic rate taxpayer (income up to £50,270):
- Savings interest: £800
- PSA: £1,000
- Tax due: £0
Higher rate taxpayer (income £50,271-£125,140):
- Savings interest: £1,200
- PSA: £500
- Taxable interest: £700
- Tax at 40%: £280
Additional rate taxpayer (income over £125,140):
- No PSA available
- All savings interest is taxable at 45%
The Starting Rate for Savings
If your non-savings income (employment, self-employment, pensions) is below £17,570, you may qualify for the Starting Rate for Savings.
How it works
- Up to £5,000 of savings income can be taxed at 0%
- This is reduced by £1 for every £1 of non-savings income above £12,570
- If non-savings income exceeds £17,570, the starting rate is not available
Example
If your only income is:
- Employment income: £14,000
- Savings interest: £2,500
Calculation:
- Personal Allowance: £12,570 (tax-free)
- Remaining employment income: £1,430
- Starting rate band available: £5,000 - £1,430 = £3,570
- Your £2,500 interest falls within this, so it is taxed at 0%
- PSA also applies, providing additional tax-free interest
This benefit is most relevant for part-time workers, retirees, and those with low incomes.
Interest Within ISAs
Interest earned in Cash ISAs and Stocks and Shares ISAs is completely tax-free and does not count toward your PSA.
ISA allowance for 2025/26
- Total ISA allowance: £20,000 per tax year
- Can be split between Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, and Lifetime ISA
If you have significant savings, maximising your ISA allowance is a tax-efficient way to earn interest.
Types of Interest Covered
Interest that uses your PSA
- Current account interest
- Savings account interest
- Fixed-rate bonds
- Notice accounts
- Credit union dividends
- Interest from peer-to-peer lending
- Interest from NS&I products (except Premium Bonds)
- Corporate bond interest
Tax-free interest (does not use PSA)
- Cash ISA interest
- Premium Bond prizes
- Children's Bonus Bonds
- Save As You Earn (SAYE) interest
When You Need to Report Interest
You do not need to report if
- Your interest is within your PSA, AND
- You have no other reason to complete a Self Assessment return
HMRC receives information about your interest directly from banks and will adjust your tax code if necessary.
You must report via Self Assessment if
- Your savings interest exceeds £10,000, OR
- You have other untaxed income to report, OR
- You are already in Self Assessment
PAYE tax code adjustments
If you earn interest above your PSA but below £10,000, HMRC typically collects the tax by adjusting your PAYE tax code for the following year. This means tax is spread across your wages or pension.
Joint Accounts
Interest from joint accounts is split equally between account holders for tax purposes, regardless of who contributed more.
Example
- Joint account interest: £1,600
- Each person is treated as receiving £800
- Each person uses their own PSA against their share
If one person is a higher rate taxpayer (£500 PSA) and one is a basic rate taxpayer (£1,000 PSA), they may have different tax liabilities even though they share the account.
NS&I Products
National Savings & Investments (NS&I) products have various tax treatments:
Tax-free NS&I products
- Premium Bonds - Prizes are tax-free
- Children's Bonus Bonds - Interest is tax-free
Taxable NS&I products
- Direct Saver - Interest is taxable, uses PSA
- Income Bonds - Interest is taxable, uses PSA
- Investment Account - Interest is taxable, uses PSA
- British Savings Bonds - Interest is taxable, uses PSA
NS&I pays interest gross, and you are responsible for any tax due.
Calculating Your Tax
Step-by-step calculation
- Add up all taxable interest from all sources
- Deduct your Personal Savings Allowance (if available)
- Check if the Starting Rate for Savings applies
- Tax remaining interest at your marginal rate
Tax rates on savings interest
| Band | Rate |
|---|---|
| Starting rate for savings | 0% (up to £5,000) |
| Basic rate | 20% |
| Higher rate | 40% |
| Additional rate | 45% |
Record Keeping
Keep records of:
- Interest statements from each bank/building society
- Annual interest summaries (usually available in April)
- ISA statements (to confirm tax-free status)
- NS&I statements
Banks send interest information to HMRC automatically, but keeping your own records helps you verify tax calculations and complete Self Assessment if required.
How QTax Helps
QTax supports you with savings interest by:
- Calculating your total taxable interest
- Applying your Personal Savings Allowance correctly
- Determining if the Starting Rate for Savings applies
- Including interest in your Self Assessment return when required
FAQs
Do I pay tax on interest if I am retired?
It depends on your total income. If your pension and other income make you a basic rate taxpayer, you get a £1,000 PSA. If you are a higher rate taxpayer, your PSA is £500. The Starting Rate for Savings may also help if your non-savings income is low.
Is interest from overseas accounts taxed?
Yes, if you are UK resident, you pay UK tax on worldwide savings interest. You may be able to claim Foreign Tax Credit Relief if tax was withheld abroad.
What happens if I do not report taxable interest?
HMRC receives interest data from banks. If you owe tax, they will usually adjust your tax code or contact you. Failure to report when required could result in penalties.
Can I use my spouse's PSA?
No, the PSA is individual. However, you could consider holding savings in the name of the spouse with the lower tax rate to benefit from their higher PSA.
Conclusion
Most UK savers pay no tax on their interest thanks to the Personal Savings Allowance. Understanding how the PSA works, combined with using ISAs for larger savings, can help you keep more of your interest earnings. If your interest exceeds the limits or you are in Self Assessment, make sure to report it correctly.
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