Tax on savings interest explained: can you avoid it? 

Who pays tax on curiosity?

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

Fortuitously, more often than not this doesn’t apply. There are 4 methods to keep away from this fee to HMRC: Money ISAs, the Private Financial savings Allowance, the beginning charge 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 revenue we obtain annually is tax free. For many of us that’s taken up from our salaries. However should you don’t earn a lot or something in any respect, then you may keep away from tax on curiosity you earn beneath this quantity.

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

The Beginning Charge for Financial savings allowance defined

There’s an additional stage 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 depends upon your wage.

To be eligible it is advisable to earn lower than £17,570 and for anybody incomes beneath £12,570 you get the total £5,000 a yr allowance. Which means anybody with zero revenue, can get the total £17,570 in curiosity tax free annually.

Then for each £1 you earn over £12,570 (in revenue aside from curiosity), the beginning charge 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 should you can’t use your Private Allowance for financial savings, you continue to won’t have to fret about paying tax in your curiosity.

That’s due to Private Financial savings Allowance (PSA), price 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 dimensions of this varies relying in your tax bracket.

And for most simple charge 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 best way, that is on high of the Beginning Charge for Financial savings should you’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 Charge	Private Financial savings Allowance
£0-£12,570	0%	£1,000 (plus Private Tax Allowance and Beginning Charge)
£12,571 – £50,270	20% (Primary)	£1,000
£50,271 – £125,140	40% (Larger)	£500
£125,141 and above	45% (Extra)	£0

Money ISAs: all curiosity is tax free

You’re in all probability already acquainted with 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 reasonably than investments.

There’s an annual ISA allowance, which limits how a lot you may pay in a single annually to £20,000, although that allowance resets for brand spanking 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 possibly can learn more about ISAs here.

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

Nevertheless, should you’re not going to exceed about your Private Financial savings Allowance then it often is smart to go for whichever financial savings account pays the upper rate of interest. And even should you do earn greater than your PSA exterior of an ISA, that would nonetheless be price 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 probably scale back the annual allowance it can save you as new money. So it is smart to make use of your ISA allowance this monetary yr should you 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 possibly can win as much as £1 million kilos every month, although most individuals will get quite a bit 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 won’t get the three.6% charge. In reality you in all probability 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 complete quantity), it’s extremely unlikely you’ll win something in any respect with a stability so low. In reality, even financial savings within the low 1000’s have a low likelihood of successful any prize, not to mention one which’s near the prize charge.