Taxation of Interest Income in the UK

Interest earned on savings is a common form of income, yet many people are unsure how it is taxed. Whether interest comes from a bank, building society, or another source, understanding how the rules work can help avoid surprises and plan more effectively.

This article provides an overview of how interest income is taxed in the UK, including the savings allowance and the 0% starting rate.

How Interest Is Paid and Taxed

Interest from UK banks and building societies is usually paid gross, meaning no tax is deducted at source. You receive the full amount of interest earned, and any tax due is dealt with through your Self-Assessment tax return, or PAYE adjustment where applicable.

For tax purposes, interest is treated as savings income and is taxed after non-savings income. Non-savings income includes items such as employment income, self-employment profits, pensions, and rental income. This ordering matters because it affects which tax bands your interest falls into.

Interest is taxed at the savings rates of tax. For the 2025/26 tax year, these rates are 0%, 20%, 40%, or 45%, depending on your overall level of income. It is worth noting that higher savings tax rates are expected to apply from April 2027, which may make forward planning increasingly important.

The Savings Allowance Explained

Most individuals benefit from a savings allowance, which allows a certain amount of interest to be taxed at 0%. This is often referred to as the personal savings allowance.

The amount of allowance available depends on your overall taxable income:

• If you are a basic rate taxpayer, your savings allowance is £1,000.

• If you are a higher rate taxpayer, your savings allowance is £500.

• If you are an additional rate taxpayer, no savings allowance is available.

A practical way to assess which category applies is to look at your total taxable income. If it exceeds the basic rate limit, you will be treated as having higher rate income. If it exceeds the higher rate limit, you will be treated as having additional rate income.

It is important to understand that the savings allowance is not an exemption. Interest covered by the allowance is still taxable income; it is simply taxed at 0%. This means the interest must still be included in your tax calculation and it uses up your tax bands in the normal way.

Any interest above the savings allowance is taxed at the applicable savings rate depending on where it falls within your tax bands.

The 0% Starting Rate for Savings

In addition to the savings allowance, there is a separate 0% starting rate that can apply to interest income. This is particularly relevant for individuals with low or modest levels of non-savings income.

The starting rate applies where taxable non-savings income is less than £5,000. In these circumstances:

• Any non-savings income is taxed first, usually at 20%.

• The remaining balance of the £5,000 band can then be used to tax interest at 0%.

As an example, assume an individual earns £16,000 in wages during the tax year and also receives £200 of interest from their savings. The personal allowance of £12,570 is first set against the wages, meaning only £3,430 of the wages is taxable. This taxable non-savings income then reduces the £5,000 starting rate band for savings on a pound-for-pound basis.

As a result, the starting rate band is reduced by £3,430, leaving £1,570 of the band still available. Because the individual’s savings interest of £200 falls entirely within this remaining starting rate band, it is taxed at 0%, and no tax is payable on the interest.

As with the savings allowance, interest taxed at the starting rate still counts as taxable income and must be reported. The key difference is that interest falling within the starting rate band does not use up the savings allowance. This can be particularly valuable for individuals with small salaries or part-time income who also hold savings.

Once the starting rate band is fully used, any remaining interest is then considered against the savings allowance and, after that, taxed at the normal savings rates.

Speak to an Expert

If you receive interest income and are unsure how it is taxed, or if you want to ensure you are making the most of available allowances, professional advice can be invaluable. Please feel free to get in touch with our team - we would be please to assist you.

Authored by: London Team