Savings and tax: a complete guide to getting it right

We explain the logic behind when you have to pay tax on savings interest and when you don’t

piles of money
(Image credit: getty images)

However you feel about tax it’s something you can’t avoid. Tax on income is the government’s largest source of revenue and that includes savings interest.

The good news is that since the personal savings allowance was introduced in 2016, most people don’t have to pay tax on the interest they earn. If you’re one of the small number of people who do need to pay it, though, understanding how the tax-free allowances work can help you keep your tax bill down.

How much interest can I earn without paying tax? 

The amount of interest you can earn tax-free depends on your overall income.

There are three different allowances you get each year that determine when you pay tax on interest – your personal allowance, the starting rate for savings and your personal savings allowance – but if you earn £17,570 or more only the personal savings allowance applies.

Everyone can earn a certain amount of money without paying income tax on it – this is known as your personal allowance. For most people it’s £12,570 in the 2021-22 tax year but it can be more in some cases, less if you earn more than £100,000 or nothing if you earn £125,140 or more.

If you haven’t used up your personal allowance on the income you get from your job, pension or elsewhere, you can use the rest of it to earn savings interest tax-free.

On top of this, the starting rate for savings, which is designed to help people on low incomes, means you may be able to earn another £5,000 in interest without paying tax on it but this depends on your other income.

For every £1 you earn above your personal allowance the £5,000 goes down by £1. So if you earn £1,000 above your personal allowance your starting rate for savings will be £4,000. Once you earn £17,570 or more this becomes zero.

The personal savings allowance lets you earn another £1,000 in savings interest tax-free if you’re a basic-rate taxpayer (if your taxable income is £12,571 to £50,270 in England, Wales and Northern Ireland – tax bands are different in Scotland) or £500 if you’re a higher-rate taxpayer (your taxable income is £50,271 to £150,000). You get no personal savings allowance if you pay the additional rate above £150,000.

At what point do I need to pay tax? 

If you earn less than your personal allowance, if it’s £12,570 you can earn a total of £18,570 a year including savings before paying tax as you’ll get the full starting rate for savings of £5,000 plus the £1,000 personal savings allowance.

For example, if you earn £10,000 a year from your job you would be able to earn another £8,570 in savings interest without paying any tax on it, which would be way more than most people would get. If you had a savings account paying interest at 1% you would need to have a massive £857,000 in savings to earn this much interest in a year.

Once you earn more than £12,570 but less than £17,570 you get some of the starting rate plus the £1,000 personal savings allowance. So if you had a salary of £15,000 you would be able to earn £3,570 in savings interest tax-free (a starting rate of £2,570 plus £1,000). Again, most people won’t earn this much as you’d need a balance of £357,000 in an account paying 1%.

If you earn more than £17,570 but are still a basic-rate taxpayer you just get the personal savings allowance of £1,000 or £500 if you pay the higher rate. You would need a balance of £50,000 to earn interest of £500 at 1%.

How much can I save in an Isa? 

On top of the allowances above, you can also save £20,000 a year into an Isa tax-free, so you only need to use your personal savings allowance if you’re saving more than this or you’re not saving into an Isa.

It’s only worth choosing a cash Isa if you’re in the minority of people who do have to pay tax on interest. Unless you’re close to having to pay tax and would be pushed over the threshold if the currently very low savings rates were to rise or the amount you have in savings increased, you’re usually better off choosing the savings account with the highest interest rate whether it’s a cash Isa or not.

How much tax do I have to pay? 

If you do need to pay tax on your savings interest, you pay it at your normal rate of income tax. So on interest of £1,000 you would pay £200 at the basic rate of 20% (in England, Wales and Northern Ireland), £400 at the higher rate of 40% and £450 at the additional rate of 45%.

For example, if you were a high earner with a salary of £200,000 you would be taxed on all the interest you earned on savings once you had used up your £20,000 Isa allowance so as an additional rate taxpayer you would pay tax of £450 on interest of £1,000.

How do I pay the tax on my savings interest? 

All interest is paid into savings accounts without tax deducted. If you are an employee or get income from a pension, HMRC will change your tax code (the code used to work out how much income tax you need to pay) to collect the tax you owe based on the amount of interest you earned the previous year using information sent to it by banks and building societies.

If you complete a self-assessment tax return you should declare any non-Isa interest there to pay the tax. You don’t need to include interest from Isas.

What if I’ve paid too much tax? 

 If you think you’ve paid too much tax on interest in a particular tax year you can reclaim it up to four years after the end of that tax year through your self-assessment tax return or by filling in form R40 and sending it to HMRC. You should get the overpaid tax back in six weeks. 

Cathy Hudson

Cathy has been a journalist since 2001 and specialises in money, property and technology. Before going freelance in 2018 she worked at Which? for 12 years, first as a money writer then as an editor in the money, home, tech and cars teams. Publications she has written for as a freelancer include,, The i Paper, the London Evening Standard, Which? and Which? Computing.