How savings tax works

Watch: 'You don't pay tax on savings... but you might on the interest'

If you prefer to watch, see Martin's 2-minute video explainer on how savings tax works (though do note the rates he mentions on top accounts are now out of date):

How savings tax actually works

Savings aren't taxed - it's the interest on them that is (or might be). Latest statistics (from investment platform AJ Bell) show that around 2.6 million people are expected to pay some tax on their savings interest in the 2025/26 tax year. Yet most won't pay anything, due to a combination of tax-free allowances. Here's how they work...

• Personal Allowance: Most can earn up to £12,570 tax-free.

  This is how much you can earn (from anything, eg, work, pension, interest) before paying Income Tax. If your total earnings, including interest, are less than that, then all your interest is tax-free.
  

• Starting Rate for Savings: If you've low work earnings but bigger savings interest.

  The Starting Rate for Savings means some can earn up to £18,570 of salary and interest combined without paying any tax on it. Essentially, this Starting Rate kicks in above your Personal Allowance, and allows you to earn up to £5,000 in savings interest on top (so for most, this'll be from £12,570 to £17,570) without being charged tax.
  
  However, for every £1 of extra income (other than savings interest income) you have above your Personal Allowance, you lose £1 of the Starting Rate for Savings. So, someone earning £17,570 in salary wouldn't get any tax-free allowance for their savings under the Starting Rate for Savings. More info and examples are in Starting Rate for Savings.
  

• Personal Savings Allowance: Up to £1,000 tax-free interest.

  Your Personal Savings Allowance (PSA) is on top of the allowances above - it's the amount of interest you can earn from ANY & ALL SAVINGS without paying tax on it.
  
  - Basic 20% rate taxpayers can earn £1,000 interest a tax year.
  - Higher 40% rate taxpayers can earn £500 interest a tax year.
  - Top 45% rate taxpayers do not get a PSA.
  
  To put this in context, the top easy-access rate is currently 5%. You'd need £20,000 in it to generate £1,000 interest, so only basic-rate taxpayers with more than that would pay tax (for higher-rate taxpayers it's over £10,000). This, combined with cash ISAs, means all but the biggest savers won't pay any tax on interest at all. Full info's in our Personal Savings Allowance guide.
  
  Note for Scottish residents: You pay different rates of Income Tax, but for the purposes of the Personal Savings Allowance the English tax bands are used – so for 2025/26, most will have the full £1,000 PSA if they earn up to £50,270.

If your Personal Allowance is taken up by income from work, you earn too much to benefit from the Starting Rate for Savings, and you've used your Personal Savings Allowance (or don't get one), there are a couple of ways you can shelter more savings interest from tax.

What counts as 'interest'?

HM Revenue & Customs (HMRC) defines interest as "the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another". For tax purposes, it may come from money held in:

• Bank accounts

• Savings accounts (including those held with credit unions and building societies)

• Savings accounts held in other currencies within the UK

• Sharia accounts (defined as expected profit)

• Peer-to-peer lending

• Corporate bonds

• Government bonds (including gilts)

• Interest distributions from authorised unit trusts, open-ended investment companies and investment trusts

• Most types of purchased life annuity payments.

Other ways to (legally) avoid tax on savings interest

There are two main ways you can do this...

Use Cash ISAs - you can save up to £20,000 tax-free each year

Cash ISAs are just savings accounts where the interest is NEVER taxed, and crucially the interest doesn't count towards your Starting Rate for Savings or Personal Savings Allowance, so this is extra on top of those. See Martin's 'Understanding ISAs is a piece of cake' video, as a primer:

Your ISA allowance is a crucial extra allowance, which anyone who earns or saves enough to pay tax on savings interest (or thinks they may do in future) should take advantage of. Plus, right now, top cash ISA rates are right up there with the top normal savings, so there's no real rate sacrifice involved (though this has not always been the case).

To show you how important this is, let's imagine both cash ISAs and normal savings pay a top rate of 5%. So, on your £20,000, over a year:

• In the top easy-access cash ISA, you'd earn 5%, so £1,000 interest.

• In top normal savings, you'd get the same £1,000 if you don't pay tax on the interest. But you'd get just £800 after 20% tax, £600 after 40% tax or £550 after 45% tax. So, if you do need to pay tax on savings interest, the cash ISA's the winner.

And, crucially, once you've put money in a cash ISA, it stays tax-free year after year. So, you could have put £20,000 in last year, £20,000 in this tax year, and (unless the limit changes) £20,000 in next tax year. It can end up being a huge sum. All the best buys are in our Top Cash ISAs guide.

Put up to £50,000 in Premium Bonds - prizes are tax-free

We're not the biggest fan of Premium Bonds for most people. The vast majority of those with typical luck will do better just putting money in top savings.

Premium Bonds' tax-free nature, though, does mean they come into their own for people who pay tax on savings interest and have used up their ISA allowance.

In that case, provided you're putting a larger amount in (as you need to do that to have a decent chance of winning closer to the published prize rate), they can be a good option. For a full explanation, see our Are Premium Bonds worth it? guide.

There are a couple more ways you can avoid the tax on savings interest, but each of them involve doing something a little different with your money...

Buy gilts

Short-dated UK government gilts (Treasury bonds) can be tax free, returning higher rates than savings. This one's only for sophisticated savers though. Here's how this can work:

- Imagine a Treasury bond that matures in August 2026
- Its interest rate is 0.5% (that interest is taxable)
- It is a £1 bond being sold at 96p (the price moves with the market)

You buy it and hold it till it matures. In that time, you'll have got the 0.5% interest (taxed) and at the end the state will pay you £1 (untaxed, as its exempt from Capital Gains).

Thus a higher 40% rate taxpayer would have £1 plus 0.3p in interest So 100.3p for each bond they paid 96p for. That's a gain over the year of 4.5% after tax. To earn that in a taxable savings account you'd need a rate of 7.5%!

This is complex, so read the full Gilts guide before you do anything.

Invest

If you have enough in easily-accessible cash savings to cover emergencies (we usually say an amount equivalent to three to six months' income), then investing can help defray tax as your investments are subject to their own set of tax-free allowances.

On a wide spread of assets over 5+ years, on the balance of probability, investing will likely substantially outperform saving, so many should have some of their assets invested. For help on where to start listen to Martin's 'Beginner's guide to investing' podcast.

You can usually invest through one (or both) of two different sorts of accounts...

• Stocks & Shares ISAs. This is the investing counterpart to the cash ISA, though sadly you only get one £20,000 annual allowance to cover both. So, if you've saved £10,000 in a cash ISA already in the tax year, you'll only be able to put £10,000 in to a stocks & shares ISA in that tax year.
  
  Yet in an ISA, income from capital gains (your investments going up in value), dividends (income for holding shares) and bond interest are all tax-free. Any gains or income within a stocks & shares ISA doesn't count towards the allowances below. For full info, read our Investment ISA guide.

• A General Investment Account (GIA). In a GIA, you get two main tax-free allowances, assuming you haven't used them up elsewhere (eg selling a buy-to-let property). Those are:
  
  - Capital Gains Tax allowance - £3,000. This means you can make £3,000 in capital gains (in the 2025/26 tax year) before Capital Gains Tax kicks in. A capital gain is realised when, for example, you sell shares at a profit, or make money selling a property that's not your main residence.
  
  - Dividend allowance - £500. This allows you to earn £500 in dividends before you need to pay tax. A dividend is a payment from a company that you own shares in. Many investors like to get an income from shares, which is especially important if the shares are unlikely to rise significantly in value.

Of course, investing does come with a risk - that you could lose some, or all, of your money if you invest in companies that go bust, for example. If this is all new to you, see Investing for Beginners to check if it's likely right for you.

I'm one of the people who does owe tax – how do I pay it?