Most Savers Pay Nothing, and That Is Why the Rules Catch People
Savings interest is taxable income. It has been paid to you without any tax taken off since April 2016, which leads a lot of people to assume it is tax free. For most savers it is, because two allowances cover it. For a growing minority it is not, and they tend to find out from a tax code they do not recognise or a brown envelope from HMRC a year later.
The subject matters more this winter than it has for a while. The Budget on 28 October 2026 confirmed that the tax rates on savings interest will rise to 24, 44 and 49 percent from 6 April 2027, four points above the rates on wages. The allowances are not changing, so the people already paying will pay more, and there are a few months left to arrange things sensibly.
This guide covers how the tax works in 2026/27, three worked examples, what changes in April 2027, and what we would do about it.
How Much Interest Can You Earn Tax Free?
There are three layers, and you can use all of them in the same year.
Your Personal Allowance. The first £12,570 of income is tax free. If your wages or pension do not use it all, the rest is set against your interest.
The starting rate for savings. Up to £5,000 of interest is taxed at 0 percent, but only if your other income is low. For every £1 of wages, pension or profit you have above the Personal Allowance, you lose £1 of the starting rate band. Once that other income reaches £17,570 the band has gone completely. Dividends do not count as other income for this test, which becomes important later.
The Personal Savings Allowance. On top of the above, the amount depends on the highest rate of income tax you pay.
| Your tax band | Income in 2026/27 | Personal Savings Allowance |
|---|---|---|
| Basic rate | Up to £50,270 | £1,000 |
| Higher rate | £50,271 to £125,140 | £500 |
| Additional rate | Over £125,140 | Nil |
Put the three together and someone with no other income can receive £18,570 of interest in a year and pay nothing: £12,570 plus £5,000 plus £1,000.
To put the Personal Savings Allowance into pounds of savings, here is how much you can hold outside an ISA before the interest goes over it.
| Interest rate | Basic rate taxpayer (£1,000) | Higher rate taxpayer (£500) |
|---|---|---|
| 3% | £33,333 | £16,667 |
| 4% | £25,000 | £12,500 |
| 5% | £20,000 | £10,000 |
A higher rate taxpayer with £15,000 in a decent easy access account is already over. That is not a large sum, and it is why the number of people paying tax on interest has grown so quickly since rates rose. The Personal Savings Allowance has not moved since it was introduced in April 2016.
What Counts as Savings Interest
More than most people expect. For tax purposes, savings income includes:
- interest from bank, building society and credit union accounts
- interest on fixed rate bonds and notice accounts
- taxable National Savings and Investments products, such as Income Bonds
- interest from gilts and corporate bonds
- peer to peer lending interest
- distributions from funds that hold mostly bonds and cash
- the interest element of a PPI or other compensation payment
- interest a company pays you on money you have lent it
It does not include interest inside an ISA, Premium Bond prizes, or dividends from shares. Dividends have their own allowance and their own rates, which we cover in our guide to what a dividend is.
Three rules cause most of the confusion.
Joint accounts are split equally. HMRC treats each holder as receiving half the interest, whoever paid the money in.
Children's accounts can come back to the parent. If a parent gives money to their own child under 18 and it earns more than £100 of interest in a year, all of that interest is taxed as the parent's. The limit is per parent. Money from grandparents is not caught.
Scottish taxpayers use the UK figures. Savings interest is taxed at UK rates wherever you live, and your Personal Savings Allowance is set by the UK higher rate threshold of £50,270, not the Scottish bands.
Worked Example 1: The Pay Rise That Costs a Saver £160
The Personal Savings Allowance does not taper. It halves the moment a single pound of your income falls into the higher rate band. To find your band you add your interest to your other income, so the interest itself can tip you over.
Priya earns a salary of £49,300 and receives £900 of interest. Her total income is £50,200, just under the £50,270 threshold. She is a basic rate taxpayer, her allowance is £1,000, and the interest is tax free.
She then gets a £500 pay rise. Her total income is now £50,700, which makes her a higher rate taxpayer with an allowance of £500. The first £500 of her interest is covered. The remaining £400 sits in the higher rate band and is taxed at 40 percent.
A £500 pay rise has produced a £160 tax bill on her savings, on top of the tax and National Insurance on the rise itself. From April 2027 the same £400 would be taxed at 44 percent, which is £176.
The fix is cheap. A personal pension contribution stretches the basic rate band by the gross amount paid in. Priya is £430 over the threshold, so paying £344 into a personal pension, which the provider tops up to £430, puts her back into the basic rate band and restores the full £1,000 allowance. She saves £160 of tax by moving £344 into her own pension. Salary sacrifice achieves the same thing by reducing the salary figure in the first place.
We see this most often with people whose income is within a few thousand pounds of £50,270, and almost none of them know the cliff edge exists. If that is you, it is worth adding up your expected interest before 5 April, while there is still time to act.
Worked Example 2: A Pensioner and the Starting Rate
Margaret has a State Pension and a small private pension that come to £15,000 a year. She also has £4,200 of interest from savings built up over her working life.
Her pensions exceed the Personal Allowance by £2,430. That reduces her starting rate band from £5,000 to £2,570. She is a basic rate taxpayer, so she also has the £1,000 Personal Savings Allowance.
| Amount | |
|---|---|
| Interest received | £4,200 |
| Covered by starting rate for savings | £2,570 |
| Covered by Personal Savings Allowance | £1,000 |
| Taxable interest | £630 |
| Tax at 20% | £126 |
From April 2027 that £630 would be taxed at 24 percent, so £151.20.
Margaret will not be asked to fill in a tax return for this. HMRC will work it out from what her banks report and either adjust the tax code on her private pension or send her a bill. Which brings us to the part people find most irritating.
How HMRC Collects the Tax
Banks and building societies tell HMRC after 5 April each year how much interest they paid to each customer. What happens next depends on your circumstances.
If you are employed or have a pension, HMRC usually changes your tax code. The code collects any tax owed for the year just ended and also includes an estimate of the interest you will earn in the current year. That estimate is simply last year's figure. If you have since moved money into an ISA, spent it on a house deposit, or your fixed rate deal has ended on a lower rate, the estimate is wrong and you are overpaying through your wages every month. You can check and correct the figure in your Personal Tax Account. Our guide to tax codes explains how to read the notice.
If HMRC cannot use a tax code, it sends a Simple Assessment, which is a calculation and a bill with a payment date.
If you already file a tax return, you put the interest on it. Do not assume HMRC has the figures and leave the boxes empty. The return is your declaration, and the bank data is used to check it.
If your interest is more than £10,000, you must register for Self Assessment even if you have never needed to before.
GOV.UK says the calculation is usually sent between June and the following March. If you know you owe tax and have heard nothing by the end of March, it is your job to contact HMRC, not theirs to find you.
It works in the other direction too. If tax has been collected on interest that should have been covered by your allowances, you can claim it back on your tax return or on form R40. You have four years from the end of the tax year.
When the Interest Is Taxed: The Fixed Rate Bond Trap
Interest is taxed in the year it is paid or made available to you, not the year it is earned. For an ordinary account that makes no difference. For a multi year fixed rate bond it can make a large one.
Take £20,000 in a three year bond at 4.5 percent. If the interest is paid out or credited each year, you receive roughly £900, £940 and £983. Each is under the £1,000 allowance, so a basic rate taxpayer with no other interest pays nothing.
If the same bond pays all of its interest at maturity and you cannot touch it before then, the full £2,823 lands in a single tax year. Only £1,000 is covered. The other £1,823 is taxed at 20 percent, which is £365, or £438 if the bond matures after 5 April 2027.
The return is identical and the tax bill is not. Before you open a fixed rate bond, read how the provider treats interest. If there is a choice between annual interest and interest at maturity, annual is nearly always the better answer for tax, and with the rate rise coming, a bond that pays everything out in 2027/28 or later is the worst version of the product.
What Changes on 6 April 2027
The Autumn Budget 2025 announced a two point rise in the tax rates on savings income. The Budget on 28 October 2026 added two more. The measure is in the Finance Bill now going through Parliament.
| 2026/27 | From 6 April 2027 | |
|---|---|---|
| Savings basic rate | 20% | 24% |
| Savings higher rate | 40% | 44% |
| Savings additional rate | 45% | 49% |
| Personal Savings Allowance | £1,000 / £500 / nil | No change |
| Starting rate for savings | £5,000 at 0% | No change |
| Cash ISA limit | £20,000 | £20,000 |
The same four point rise applies to rental profits, which we cover in our guide to tax on rental income.
Three things are worth knowing about this.
The cash ISA cut has been dropped. The plan to cap cash ISA deposits at £12,000 for under 65s from April 2027 was reversed in the same Budget. The full £20,000 can still go into cash.
The Personal Allowance will be used in a fixed order. At the moment the law sets your allowance against your income in whichever way gives the lowest tax bill. From April 2027 it must go against wages, pensions and trading profits first. Once interest is taxed at a higher rate than earnings you would want the allowance set against the interest, and the new ordering rule stops that.
The government's own numbers show how wide this goes. HMRC's policy paper estimates that around 6 million people will have savings income above the tax free allowances by 2031/32, about 13 percent of taxpayers, with an average increase of £113 a year in 2027/28. The Budget document makes the point that 84 percent of income tax payers are unaffected, which is true today and will be less true each year the allowances stay frozen.
The stated reasoning is that interest carries no National Insurance, so a higher income tax rate narrows the gap with wages. As arithmetic that holds: an employee pays 20 percent tax and 8 percent National Insurance on a basic rate pound of salary, against 24 percent on a pound of interest. Our objection is a different one. Savings are built from income that has already been taxed, and with inflation where it has been, a good part of the interest is only keeping the money's value level. Taxing that at 44 percent is a tax on standing still.
Company Directors: Interest on a Loan to Your Own Company
This is the planning point we raise most often and see used least.
Many owner managed companies owe their director money, because the director funded the business at the start or has left dividends undrawn. That balance is a director's loan account in credit. The company can pay interest on it at a commercial rate, and that interest is savings income in the director's hands.
Now go back to the starting rate for savings. It is lost when your non-savings income goes above £17,570, and dividends are ignored for that test. A director taking a salary of £12,570 and the rest as dividends, which is a very common arrangement, has the whole £5,000 band available and usually has no interest to put in it.
Daniel is the sole director of a consultancy. He takes a salary of £12,570 and dividends of £30,000, and the company owes him £60,000 that he put in when it started. The company begins paying him 8 percent interest on the loan, which is £4,800 a year.
| As interest | As a dividend instead | |
|---|---|---|
| Company profit used | £4,800 | £4,800 |
| Corporation tax at 19% | Nil, interest is deductible | £912 |
| Paid to Daniel | £4,800 | £3,888 |
| Daniel's tax | Nil, within the starting rate | £418 at 10.75% |
| Daniel keeps | £4,800 | £3,470 |
Daniel is about £1,330 a year better off, and more if the company pays corporation tax above the 19 percent small profits rate. The April 2027 rate rise does not touch this, because interest inside the starting rate band and the Personal Savings Allowance is still taxed at 0 percent.
There is paperwork, and it is the reason the idea is underused.
- The company must deduct 20 percent income tax from each interest payment, report it on form CT61 and pay it to HMRC within 14 days of the end of the quarter. Daniel receives £3,840 and reclaims the £960 through his tax return.
- The rate has to be one a commercial lender might charge for an unsecured loan to that company. An inflated rate invites HMRC to treat the excess as something else.
- There should be a short written loan agreement, and the interest goes on Daniel's Self Assessment return every year.
It only works where the company owes the director money, not the other way round, and it sits alongside the usual salary and dividend planning in our guide to directors' remuneration. For the right client it is one of the few genuinely tax free ways left to take money out of a company.
Sole Traders and Tax Reserve Accounts
We tell every sole trader to move a share of each receipt into a separate savings account for the January bill and the payments on account that follow. The interest on that account is yours personally. It is not trading income, it does not go in the business accounts, and it belongs in the interest box on your return, even if the account is in the business name. It is regularly left off.
Higher Earners: Interest Counts in Other Tests
Interest is part of your adjusted net income. That figure decides whether you start losing your Personal Allowance above £100,000 and whether the High Income Child Benefit Charge applies above £60,000. It also decides whether a couple can use the Marriage Allowance, which is lost if the recipient pays higher rate tax on any income, interest included. A few hundred pounds of interest in the wrong place can cost far more than the tax on the interest.
What We Would Do Before April 2027
Add up your interest across every account. Banks report separately and HMRC adds the figures together. Most people who are surprised by a bill had simply never done the sum.
Use both ISA allowances. A couple can shelter £40,000 this tax year and another £40,000 from 6 April. With rates on unsheltered interest at 24 and 44 percent, a cash ISA paying slightly less than a taxable account will often leave you with more.
Hold savings in the right name. Between spouses and civil partners, savings can be given outright with no tax charge. If one of you has unused starting rate band or a larger Personal Savings Allowance, that is where the taxable savings should sit. The gift has to be genuine: the money becomes theirs.
Check the maturity date and interest terms on any fixed rate bond you are about to open, for the reason set out above.
Fix your tax code if the estimate is stale. HMRC will not know you emptied the account.
Do not let tax drive a bad decision. Paying 24 percent on a good rate is better than paying nothing on a poor one. And an emergency fund should stay easy to reach, whatever the tax treatment.
Common Mistakes
- Believing interest is tax free because no tax was deducted. Banks stopped deducting tax in 2016. The liability did not go away.
- Looking at each account on its own. The allowances apply to your total interest for the year.
- Forgetting that interest can push you into the higher rate band. That halves the allowance, as Priya found.
- Ignoring an unfamiliar tax code. A code that has dropped for no clear reason often contains estimated untaxed interest.
- Assuming a joint account follows whoever earned the money. It is split equally unless you can show HMRC a different beneficial ownership.
- Leaving bank interest off a tax return because "HMRC already knows".
How IAK Can Help
We prepare tax returns for employees, pensioners, landlords, sole traders and company directors across North London and Hertfordshire, and savings interest now features in most of them. Through our personal tax service we can check what HMRC has put in your tax code, reclaim tax that should not have been collected, and file your return. For directors, our tax planning work looks at salary, dividends and loan interest together, because the best answer depends on how the three interact. You can also estimate your take home pay with our salary calculator and dividend tax calculator.
Call us on 020 8445 3300 or get in touch for a free initial conversation.
Sources
- Tax on savings interest, GOV.UK, on the starting rate for savings, the Personal Savings Allowance, joint accounts, how tax is collected, the £10,000 Self Assessment trigger and the four year time limit for claims.
- Income Tax: changes to tax rates for property and savings income, GOV.UK, published 29 October 2026, for the 24, 44 and 49 percent rates from April 2027 and the estimates of 6 million people and £113 a year.
- Budget 2026, HM Treasury, published 28 October 2026, for the further two point increase, the decision to keep the cash ISA limit at £20,000 and the 84 percent figure.
- Tax-free savings newsletter 24, GOV.UK, confirming that the starting rate for savings and Personal Savings Allowance are unchanged and that the £12,000 cash ISA cap will not take effect.
- Change to tax rates for property, savings and dividend income: technical note, GOV.UK, on the new order in which the Personal Allowance is set against income from April 2027.
- Starting rate for savings, Low Incomes Tax Reform Group, for a detailed explanation of how the 0 percent band interacts with other income.
- Income Tax Act 2007, sections 12 to 12B, for the starting rate limit and the savings nil rate that underlies the Personal Savings Allowance.