Tax on savings interest in the UK: allowances now and the 2027 rise
Basic-rate taxpayers can earn £1,000 of interest tax-free, higher-rate £500. From April 2027 the tax on interest above that rises by two points.
With savings rates higher than a few years ago, more people are paying tax on the interest they earn. At the same time, tax rates on savings income are set to rise from April 2027. This guide explains how tax on savings interest works in the UK in 2026/27, the personal savings allowance, the starting rate for savings, the April 2027 rise, and practical ways to keep more of your interest.
The personal savings allowance
Most people can earn some interest tax-free under the personal savings allowance. Basic-rate taxpayers can earn £1,000 of interest a year tax-free. Higher-rate taxpayers get £500. Additional-rate taxpayers do not get an allowance, so all their interest is taxed.
Interest counts as income, so a large amount of interest can push you into a higher tax band and shrink your allowance from £1,000 to £500. Interest earned inside ISAs does not count towards your income or your allowance at all.
The starting rate for savings
People with low earnings may also benefit from the starting rate for savings. If your other income, such as wages or pension, is below £17,570, you can earn up to £5,000 of interest at 0% on top of the personal savings allowance. The £5,000 band shrinks by £1 for every £1 of other income above your personal allowance. This is particularly useful for retirees and part-time workers with substantial savings.
Savings tax rates rise in April 2027
Interest above your allowances is taxed at your income tax rate. From April 2027, the rates on savings income go up by two percentage points: the basic rate rises from 20% to 22%, the higher rate from 40% to 42%, and the additional rate from 45% to 47%. These rates apply across the UK, including Scotland, because Scottish income tax rates do not apply to savings income.
Worked example: tax on savings interest
A basic-rate taxpayer with £30,000 in an easy-access account paying 4.5% earns £1,350 a year. The first £1,000 is tax-free under the personal savings allowance. The other £350 is taxed at 20%, which is £70 in 2026/27, rising to 22%, or £77, from April 2027. In a cash ISA, the whole £1,350 would be tax-free.
For a higher-rate taxpayer with the same savings, only £500 is tax-free, and the remaining £850 is taxed at 40%, costing £340 in 2026/27 and £357 from April 2027.
How the tax is collected
Banks pay interest without deducting tax. HMRC receives information about your interest from banks and usually collects any tax due by changing your tax code, so it is taken from your wages or pension. If you complete a Self Assessment tax return, you declare the interest there instead; see our Self Assessment guide. Check your tax code each year to make sure the estimate of your interest is reasonable.
How to reduce tax on your savings
Use your ISA allowance first. You can save £20,000 in 2026/27 across ISAs, and interest inside them is always tax-free; see ISA allowance 2026/27. From April 2027, under-65s can put up to £12,000 a year into cash ISAs.
Share savings between couples. Couples can spread savings so that both use their personal savings allowances and starting rate bands, especially if one partner pays a lower rate of tax.
Consider Premium Bonds. Premium Bonds prizes are tax-free, though the return is not guaranteed and depends on luck; see Premium Bonds explained.
Pay into a pension. Pension contributions can bring your income below a band threshold, protecting a larger personal savings allowance.
Frequently asked questions
How much savings interest is tax-free in the UK?
£1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers, plus up to £5,000 under the starting rate for those with low other income.
What will savings tax rates be from April 2027?
22%, 42% and 47% for basic, higher and additional-rate taxpayers.
Do I pay tax on ISA interest?
No. Interest in an ISA is tax-free and does not count towards your allowance.
Sources
This article is general information, not financial advice.