Very Interest-ing! 

Interest income for UK individuals can arise from a variety of sources, including (but not limited to) savings accounts, current accounts, fixed-term deposits, corporate bonds, government gilts, peer-to-peer lending platforms, and some unit trusts.

For most individuals, the interest they receive will be from banks and building societies. Whether an income tax liability will arise, and at what rate, will depend on a variety of factors.

Taxable or Tax-Free?

Generally, interest arising during a tax year (in other words, received or credited to an account) is subject to income tax, but some types are exempt. For example, interest earned within individual savings accounts (ISAs) is not subject to income tax, regardless of the amount. Premium Bond prizes and interest from some National Savings & Investments (NS&I) products also fall outside the scope of taxation. Interest on damages or compensation for personal injuries may be tax-exempt in specific circumstances.

It must also be remembered that individuals who are resident in the UK for tax purposes are liable to income tax on interest from overseas accounts and investments, which must be declared on a selfassessment tax return, and foreign tax paid may be offset up to the amount of any UK liability.

Interest from joint accounts is typically divided equally between account holders for tax purposes, unless there is evidence that the funds belong in unequal shares.

The Personal Savings Allowance

Having determined that interest is taxable, the first consideration will be whether this exceeds the personal savings allowance (PSA), which allows most individuals to earn an amount of savings income tax-free each tax year.

The allowance depends on the individual’s marginal rate of income tax. Basic-rate taxpayers (i.e., those with income up to £50,270 for 2025/26) can earn up to £1,000 in interest tax-free. Higher-rate taxpayers (i.e., those with income between £50,271 and £125,140) receive a reduced allowance of £500 per year. Additional-rate taxpayers (i.e., those with income over £125,140) do not benefit from the PSA and must pay tax on all their interest income.

Personal Allowance and the Starting Rate

If an individual’s total income, including interest after deducting the savings allowance, does not exceed the annual personal allowance of £12,570, generally income tax will not arise.

There is also a starting rate of up to £5,000 for individuals with an income of up to £17,570. Every £1 of other income above the personal allowance reduces the starting rate for savings by £1, but interest within the starting rate is not taxable.

Payment of Tax on Savings

Most interest is paid gross, without deducting income tax at source. The individual must then declare any taxable interest to HMRC if it exceeds the relevant allowances outlined above. Interest income is ‘savings income’ for tax purposes and is taxed after earned income (such as salary or pension), but before dividend income. If the total taxable income, including interest, pushes an individual from the 20% basic rate band into a higher tax band, part of their interest income may be taxed at a higher rate of 40% or 45%. Note that the November 2025 Budget stated that the income tax on savings income will be increased by two percentage points from 6 April 2027, so interest would then be taxed at 22%, 42% or 47%.

Most individuals do not need to take any action if their total interest income is within their personal allowance and PSA. However, those with higher levels of savings income may need to complete a self-assessment tax return to declare the interest and pay tax. Alternatively, HMRC may adjust an individual’s tax code to collect tax on savings income through the pay-as-you-earn (PAYE) system.

Conclusion

It is important to keep records of all interest received. Failure to declare taxable interest can result in penalties and interest charges from HMRC.

Practical Tip

For children’s savings, interest is generally treated as the child’s income. However, if a parent gives money to a child and the interest exceeds £100 per year (per parent, per child), the interest is taxed as the parent’s income.