Tax on savings interest explained: can you avoid it? 

Who pays tax on curiosity?

You may not realise it, however curiosity earned on saving is technically topic to tax at your tax price. So if you happen to’re a fundamental price taxpayer and earn £100 in curiosity in a monetary yr, you’d pay £20 of that in tax. Larger price taxpayers would pay £40.

Thankfully, more often than not this doesn’t apply. There are 4 methods to keep away from this cost to HMRC: Money ISAs, the Private Financial savings Allowance, the beginning price for financial savings and at last Premium Bonds.

Nevertheless, every of those are topic to limits on how a lot is tax-free. When mixed with elevated rates of interest in recent times and frozen tax bands, it might truly imply you’ll have to pay some tax on a few of your curiosity.

Your tax free Private Allowance defined

Until you’re a brilliant excessive earner, the primary £12,570 of earnings we obtain every year is tax free. For many of us that’s taken up from our salaries. However if you happen to don’t earn a lot or something in any respect, then you may keep away from tax on curiosity you earn underneath this quantity.

So say you earn £10,000 a yr, that leaves one other £2,570 free for curiosity!

The Beginning Fee for Financial savings allowance defined

There’s an additional degree that’ll assist wipe out tax on curiosity, and that is additionally for low earners. There’s successfully an additional £5,000 allowance for curiosity earned, although how a lot you’ll get is determined by your wage.

To be eligible you might want to earn lower than £17,570 and for anybody incomes underneath £12,570 you get the total £5,000 a yr allowance. Which means anybody with zero earnings, can get the total £17,570 in curiosity tax free every year.

Then for each £1 you earn over £12,570 (in earnings apart from curiosity), the beginning price reduces by £1. So somebody incomes £15,570 a yr would lose £3,000 from this allowance, giving them a complete of £2,000 curiosity they might earn earlier than tax.

We’ve defined how the Starting Rate for Savings works intimately.

The Private Financial savings Allowance defined

Even if you happen to can’t use your Private Allowance for financial savings, you continue to may not have to fret about paying tax in your curiosity.

That’s because of Personal Savings Allowance (PSA), value as much as £1,000 in curiosity that may be earned tax free. You’ll solely pay tax on curiosity you earn over your allowance. The scale of this varies relying in your tax bracket.

And for most simple price tax payers, you want sizeable quantities saved up at one of the best charges to go over your PSA. We’ve defined intimately how the Private Financial savings Allowance works – and some issues to be careful for.

By the way in which, that is on prime of the Beginning Fee for Financial savings if you happen to’re eligible for that, giving a complete of £18,570 a yr tax free curiosity.

Private Financial savings Allowance thresholds and quantities 2025/26

Earnings	Tax Fee	Private Financial savings Allowance
£0-£12,570	0%	£1,000 (plus Private Tax Allowance and Beginning Fee)
£12,571 – £50,270	20% (Primary)	£1,000
£50,271 – £125,140	40% (Larger)	£500
£125,141 and above	45% (Further)	£0

Money ISAs: all curiosity is tax free

You’re most likely already aware of is the Money ISA. An ISA is a sort of financial savings account the place the curiosity you earn is tax-free, and the Money ISA is, because the identify counsel, one for money financial savings slightly than investments.

There’s an annual ISA allowance, which limits how a lot you may pay in a single every year to £20,000, although that allowance resets for brand new deposits every April. Which means as soon as the cash is in an ISA, it should preserve incomes tax-free curiosity yr after yr. You may learn more about ISAs here.

This tax-free standing is why so many individuals have the concept of their heads that they want an ISA for his or her financial savings. And for some time it was usually one of the best place to stash your money.

Nevertheless, if you happen to’re not going to exceed about your Private Financial savings Allowance then it often is sensible to go for whichever financial savings account pays the upper rate of interest. And even if you happen to do earn greater than your PSA outdoors of an ISA, that might nonetheless be value it if the speed is excessive sufficient even after tax is deducted.

A warning right here although: the federal government is seeking to reform ISAs, and doubtlessly scale back the annual allowance it can save you as new money. So it is sensible to make use of your ISA allowance this monetary yr if you happen to can, even when the speed is decrease, to guard your cash in future years.

Premium Bonds: earn tax free prizes

Alternatively there are Premium Bonds, at present paying 3.6%. It can save you as much as £50,000 in these and all prizes are tax free. You may win as much as £1 million kilos every month, although most individuals will get rather a lot much less – if something in any respect.

However there are issues with Premium Bonds is which is why for most individuals they need to be the final tax-free allowance you go for.

First, you may not get the three.6% price. Actually you most likely gained’t. As my analysis of three different people’s wins confirmed, it truly is all right down to luck.

Plus, although you should buy Premium Bonds with simply £25 (although they’re £1 every, that’s the minimal whole quantity), it’s extremely unlikely you’ll win something in any respect with a steadiness so low. Actually, even financial savings within the low hundreds have a low probability of successful any prize, not to mention one which’s near the prize price.