Tax on Savings: How Much Do You Pay? [Full 2026 Guide]

Tax on savings is the amount of tax you pay on interest earned from savings accounts once it exceeds your tax-free allowances.

Many people assume their savings interest is automatically tax-free, but higher interest rates have pushed more savers over the limit in recent years.

Whether you've got cash in a business account, a personal easy-access account, or a mix of both, understanding how savings tax works can help you avoid surprises.

Key points

• Most savers won't pay tax on all their interest 💷
  Your savings interest is added to your taxable income, but allowances like the Personal Savings Allowance (PSA) mean many people can still earn interest tax-free.
• Your tax band affects how much interest you can earn tax-free 🏦
  Basic rate taxpayers can earn up to £1,000 in savings interest tax-free each year, while higher rate taxpayers get £500. Additional rate taxpayers don't receive a PSA.
• Low earners may qualify for an extra £5,000 tax-free allowance 🌱
  The starting rate for savings can give people with lower non-savings income up to £5,000 of additional tax-free savings interest on top of their PSA.
• ISAs are one of the simplest ways to avoid savings tax 🛡️
  Interest earned inside a Cash ISA is tax-free and doesn't count towards your PSA. You can spread up to £20,000 per year across different ISA types.
• ANNA can help you stay on top of savings tax and reporting 🚀
  If you're self employed or run a limited company, ANNA combines tax estimates, Self Assessment filing, bookkeeping, expense tracking, and a business account in one place, making it easier to manage savings interest alongside your business finances.

How does savings tax work?

Savings tax works by adding the interest you earn from savings accounts to your other taxable income, then applying the relevant tax-free allowances and income tax rates.

In practice, most people pay tax on savings interest only once it exceeds their Personal Savings Allowance (PSA).

It's important to remember that these allowances sit alongside your other taxable income. For example, if your salary already uses up your standard Personal Allowance, only your specific savings allowance remains available for tax-free interest.

The Personal Savings Allowance

The PSA is the main protection for most savers. It lets you earn a certain amount of interest each tax year without paying tax on it.

Here are some examples to show you how it works in practice:

• If you earn £800 in interest across all your accounts, all of it falls within the PSA, so there's no tax to pay.
• If you earn £1,400, the first £1,000 is tax-free, and the remaining £400 is taxed at your usual income tax rate of 20%, meaning you would owe £80 in tax.
• Additional rate taxpayers don't receive a PSA.

💡 Good to know:

Your tax band is based on your total income, not just your salary. If you have significant rental income or self employment earnings, you might be pushed into a higher band than you expect, reducing or wiping out your PSA.

The starting rate for savings

The starting rate for savings is a special tax rule that can let you earn up to £5,000 in savings interest tax-free if your other income is low enough.

How much of the £5,000 allowance you get depends on your non-savings income, such as wages, pension income, or self employment profits. The full £5,000 starting rate applies only if your non-savings income is below your Personal Allowance of £12,570.

This allowance sits on top of your PSA, which means some people can earn even more interest without paying tax.

Once your non-savings income goes above £12,570, the allowance reduces by £1 for every extra £1 you earn. For example:

• If your non-savings income is £13,570, your starting rate for savings drops from £5,000 to £4,000.
• If your non-savings income reaches £17,570 or more, the allowance is reduced to £0, so you no longer qualify.

In practice, this mainly benefits people with low earned income, such as retirees with smaller pensions, part-time workers, or someone taking a career break.

How much tax could you actually owe?

Here's a practical look at some scenarios:

These are rough illustrations, and your actual position depends on your total income picture.

Splitting interest in joint accounts

If you hold savings in a joint account, the interest is split equally between the account holders by default. Each person uses their own PSA against their share. This can be tax-efficient if one partner earns less and therefore has a higher, or entirely unused, PSA.

You can declare a different split to HMRC if the account is owned in different proportions, but you'll need evidence to support it.

Business savings and Corporation Tax

If you're operating through a limited company, interest earned on your business bank account belongs to the company, not you personally. It's treated as business income and subject to Corporation Tax, not Income Tax or the PSA rules.

The current main rate of Corporation Tax is 25% (for profits over £250,000), with a small profits rate of 19% for profits up to £50,000.

If your profits fall between £50,000 and £250,000, you may qualify for marginal relief, which gradually increases the effective tax rate between 19% and 25% rather than applying the full 25% rate immediately.

Individual Savings Accounts: The tax-free option

Cash Individual Savings Accounts (ISAs) sit outside the savings tax system. Interest earned inside an ISA doesn't count towards your PSA.

You can put up to £20,000 into ISAs in total. This is known as your annual ISA allowance.

If you regularly earn a significant amount of interest, using your ISA allowance first is one of the simplest ways to reduce or avoid savings tax.

💡 Did you know?

Stocks and shares ISAs, lifetime ISAs, and innovative finance ISAs all share the same £20,000 annual limit. You can split the allowance across different ISA types within a single tax year, but you can't exceed £20,000 in total.

When do you need to report tax on savings?

For most employees, HMRC adjusts their tax code once you've informed them (or once they get notified by your bank) that you're earning above your PSA. The underpaid tax is typically collected through PAYE the following year.

If you're self employed, a company director, or already required to complete a Self Assessment tax return for other reasons, you'll normally report your savings interest as part of that return.

🧠 Good to know

ANNA's Self Assessment tool can help you prepare your Self Assessment tax return so nothing slips through the cracks.

As part of ANNA's current offer, eligible users can prepare and file their 2026/27 Self Assessment for free. If you've already paid for other filing software, ANNA will even refund the cost when you switch.

What happens if you don't report savings interest?

If you go over your PSA and don't report it, you could face a penalty on top of the tax owed, plus interest on the unpaid amount.

HMRC receives interest data directly from banks and building societies, so they often already know what you've earned. It's not worth the risk for what is usually a straightforward thing to declare.

Manage your savings tax with ANNA

Keeping track of savings interest, tax allowances, and reporting requirements can get complicated, especially if you're self employed or running a limited company.

ANNA helps simplify the process by bringing your cash management, bookkeeping, and tax tools together in one place.

Here's what ANNA offers:

• Self Assessment filing: File your tax return directly through the ANNA app, including any savings interest you need to declare. No more fumbling around HMRC's portal or paying for separate filing software.
• Tax estimates: ANNA tracks your income and interest as the year goes on and gives you a running estimate of what you're likely to owe.
• Business account: ANNA's dedicated business account keeps your company income, savings, and spending separate from your personal finances.
• Bookkeeping tools: Transactions are categorised automatically as they come in, and you can attach receipts straight from your phone. Your records stay tidy without having to think about it.
• Invoice management: Create and send invoices from the same app you use for everything else, and track when they've been paid. One less tool to log into, one less thing to forget.
• Expense tracking: Snap expenses as you go rather than trying to remember them in March. Everything is logged and categorised, so your allowable deductions are ready when you need them.
• 24/7 support: If something doesn't make sense or you get stuck, ANNA's support team is there around the clock.

Sign up with ANNA today and get your savings interest, business finances, and tax reporting organised.