Savings Interest Tax Calculator UK 2025/26 — How Much Tax Do You Pay on Your Interest?
With interest rates at their highest in years, more savers are now paying tax on their savings interest than at any time since 2015. The Personal Savings Allowance (PSA) protects the first £1,000 (basic rate) or £500 (higher rate) of interest. But with savings accounts now paying 4–5%, even modest savings can breach this threshold. This calculator works out exactly what you owe.
PSA 2025/26: £1,000 (basic rate), £500 (higher rate), £0 (additional rate). ISA interest is always tax-free. Starting rate for savings: up to £5,000 at 0% if non-savings income is under £17,570. HMRC collects savings tax via Self Assessment or PAYE code adjustment — banks report all interest automatically.
The Personal Savings Allowance — How It Works
The Personal Savings Allowance (PSA) was introduced in April 2016 and allows most savers to receive a certain amount of savings interest tax-free. The allowance depends on your income tax band — not your total savings or interest amount. It is calculated based on your non-savings income (salary, pension, self-employment profits) to determine which band you are in.
| Tax band | Income range | PSA (2025/26) | Tax rate on excess |
|---|---|---|---|
| Non-taxpayer | Under £12,570 | All interest tax-free | 0% (also Starting Rate) |
| Basic rate | £12,571 – £50,270 | £1,000 | 20% on excess |
| Higher rate | £50,271 – £125,140 | £500 | 40% on excess |
| Additional rate | Above £125,140 | £0 | 45% on all interest |
The Starting Rate for Savings
The starting rate for savings is a lesser-known allowance that allows up to £5,000 of savings interest to be taxed at 0% — but only if your non-savings income is low enough. The £5,000 starting rate band is reduced by £1 for every £1 of non-savings income above the personal allowance (£12,570). So:
- If your non-savings income is £12,570 or less — full £5,000 starting rate applies
- If your non-savings income is £15,570 — starting rate reduced to £2,000
- If your non-savings income is £17,570 or more — starting rate is nil
This makes the starting rate most useful for retirees, part-time workers, and others with modest earned income but significant savings interest.
ISA vs Savings Account — The Tax Comparison
Interest earned in an ISA is completely tax-free and does not use up your PSA or count towards any tax calculation. With savings rates at 4–5%, a higher-rate taxpayer with £50,000 in savings earns approximately £2,500 in interest — £2,000 of which is taxable after the £500 PSA, resulting in £800 of tax at 40%. Holding that £50,000 in a Cash ISA would save £800/year in tax and protect the interest for future years too.
How HMRC Collects Tax on Savings Interest
Banks and building societies automatically report savings interest to HMRC. If you exceed your PSA, HMRC will usually collect the tax by adjusting your PAYE tax code (reducing your tax-free allowance by the taxable interest amount, causing your employer to deduct slightly more tax each month). If you complete a Self Assessment return, declare all savings interest. If neither applies and you owe tax, HMRC will write to you with a Simple Assessment tax bill.
Frequently Asked Questions
No — Premium Bond prizes are tax-free and are not savings interest for tax purposes. They do not count towards your PSA or need to be declared to HMRC. This makes Premium Bonds tax-efficient regardless of your income tax band — though the effective rate depends on your luck in the prize draws.
Since April 2016, banks are required to pay savings interest gross (without deducting tax). If you are receiving interest with tax deducted, it may be an older account with legacy arrangements — contact your bank. If you have overpaid tax on savings interest in previous years, you can claim a refund through Self Assessment or by contacting HMRC directly using form R40.
Savings interest on a joint account is typically split 50/50 between account holders for tax purposes, each using their own PSA. If your partner is a basic-rate taxpayer and you are a higher-rate taxpayer, you could potentially hold savings solely in their name to take advantage of their £1,000 PSA vs your £500 PSA. This is legitimate tax planning — ensure the savings genuinely belong to them and are not just held in their name for tax purposes.