Do I have to Pay Tax on my Savings in the UK?

The majority of UK citizens resident here in the UK are able to earn some interest on their savings without having to pay any tax, thanks to specific allowances which include

• Your personal allowance
• The starting rate for savings
• The personal savings allowance (PSA)

All three of these allowances are allocated and refreshed each tax year, and how much you receive is dependent on your other income. To avoid any doubt, the tax year starts on the 6^th of April and ends on the 5^th of April of the following year.

Are you aware of what tax on your savings you might have to pay? Do you know what your personal savings allowance (PSA) is? For the answers to “Do I have to pay tax on my savings in the UK?” and other questions relating to savings and investments, please read on.

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Your personal savings allowance (PSA)

An excellent place to start when looking into savings and taxation is to focus on the UK’s Personal Savings Allowance, or PSA for short.

Following the introduction of the personal savings allowance in the UK back in April 2016, the vast majority of people are able to earn up to £1,000 worth of interest on their savings without having to pay taxes. It means that less than 5% of savers are liable.

The UK PSA covers any interest you might earn from savings in various accounts, including

• bank or building society accounts
• credit union accounts
• corporate bonds
• government bonds and gilts
• savings accounts

In addition, if you have any foreign currencies in a UK-based savings account, these too are covered. Income from ISAs, however, is not included in your PSA.

Tax-free savings and the starting rate for savings

“I’m wondering, do I have to pay tax on my savings in the UK if I earn interest on them?” Well, you will pay 0% UK income tax on savings interest if your combined income and savings interest earned total are £18,750 or less in one tax year. The figure of £18,750 is made up of three separate components.

• The first component is the basic income tax allowance, which is £12,570
• The second component, set up for low earners, is what is known as the starting rate for savings, and this is £5,000
• The third element is the personal saving allowance (PSA) you are entitled to, which is £1,000 per annum for basic taxpayers

The UK savings allowance can go above £18,750 if you receive specific allowances such as blind person’s or marriage allowance. In addition, your employer or pension provider is made aware of how much tax-free income you are entitled to by the tax code HMRC gives you.

You can find more information about increased UK tax on savings interest allowances on the Gov.UK website.

How to calculate your potential tax savings

If you’re wondering, “Do I have to pay tax on my savings in the UK,” a good place to start is by turning your curiosity to your potential tax savings and, in particular, the starting rate for savings.

For basic rate taxpayers and low earners, that starting rate is £5,000, and for every pound of income over your personal tax allowance of £12,570, you take one pound from the £5,000 starting rate. For example

• If you earn £16,000 per annum and your personal tax allowance is £12,570, the difference is £3,430.
• Subtract this from your £5,000 starting rate, and the balance of your starting rate is £1,570.
• But you also have your personal saving allowance of £1,000, taking your revised balance for your starting rate for savings tax to £2,570.

In other words, using this example. If you’re asking, do I have to pay tax on my savings in the UK, the answer is no, not if it’s below the £2,570 starting rate.

But the PSA isn’t the same for everyone. The starting rate for tax-free savings is, in effect, means-tested. Meanwhile, for low earners, the starting rate is £5,000. It is different if you are a higher or additional rate taxpayer.

• Higher-rate taxpayers with a tax code that means they pay 40% income tax on their earnings can only earn up to £500 in savings interest per year and pay no tax.
• For additional rate taxpayers, there is no allowance whatsoever.

If you find tax-free savings calculations with their earnings tax thresholds, tax codes, PSAs, percentages, and starting rates a little daunting, there is a tax on savings interest calculator for UK savers on the telegraph that you can use.

Has the Personal Savings Allowance (PSA) made ISAs less attractive?

Before the personal savings allowance (PSA) was introduced in 2016, paying tax on savings was pretty much unavoidable. But that all changed when the different types of ISAs were created and first introduced in 1996, offering a clear preferential choice. But after the PSA came into existence, it did lessen the attraction of ISAs somewhat for many people, particularly those with smaller saving pots, while interest rates remain so low.

However, when interest rates start to climb, as they are now doing, savers will reach their PSAs that much quicker. It means that for savers investing in the long term and looking to shelter as much of their savings as possible from the taxman, individual savings accounts (barring cash ISAs) are still an attractive vehicle.

However, as with all investing, your capital is potentially at risk.

Cash ISAs versus stocks and shares ISAs

Your investor profile defines your preferences when it comes to financial decisions, whether you are risk-tolerant or risk-averse or whether you prefer short or long-term trading.

For risk-averse individuals, the Cash ISA is often the chosen vehicle. But the penalty for the safety of your savings or investments in Cash ISAs is the low interest rate that is usually applied.

Stocks and Shares ISAs, on the other hand, earn interest at significantly higher rates than Cash ISAs. However, you must be aware of the risk that the value of your investment in an investment ISA can fall and rise. But the main attraction is that Stocks and Shares ISA taxes are virtually non-existent – so in terms of tax on savings interest in UK investment ISAs, you can rest assured that there will be no income or capital gains tax to pay.

The big attraction of Stocks and Shares ISAs is that they are tax-free savings accounts UK investors can take advantage of. So, if you are asking yourself, “Do I have to pay tax on my savings in the UK”, you don’t, even when your investment portfolio is worth hundreds of thousands of pounds and you receive dividend income. Yes, that’s right. Another feature of saving in stocks and shares is that there is also a dividend allowance. You don’t have to pay tax on any dividend income because you can receive dividend income of up to £1,000 per annum tax-free.

Stocks and shares ISAs also win in terms of taxation when compared to most forms of investing. Take OEICs (open-ended investment companies) and government and corporate bonds, for example. None of these are tax-free savings accounts in the UK. In these situations, you will pay tax on interest income in the UK as well as capital gains tax.

Significant changes made to pension savings in the UK

In recent years, there have been some changes to pension savings in the UK

• In 2026 the annual allowance is still £60,000 for most people.
• The tapered allowance for high earners is still in place, with the updated limits introduced in 2023.
• The Money Purchase Annual Allowance (MPAA), which is the limit after you start taking money from your pension, remains £10,000.

From 2024, the abolition of the Lifetime Allowance (LTA) came into effect as part of pension reform. The LTA was the maximum total value of pension savings an individual could build up over their lifetime without incurring an additional tax charge.

In 2026, the Lump Sum Allowance (LSA) is in place, with a maximum limit of £268,275 (for most people) on the total amount of tax-free lump sums you can withdraw from your UK private or workplace pension funds during your lifetime. The tax-free lump sum is now at 25%.

Pensions and taxation

Do I have to pay tax on my savings in the UK if they are in a pension? Or is pension income taxable? Regrettably, it is. Paying tax on savings when you’ve retired because all your savings are in a pension is a drag, but whatever type of pension you have, a workplace defined benefit or defined contribution scheme, or any other private pension or SIPP, HMRC demands their share of the spoils.

If you wish to carry on working after reaching the state pension age, you can do so, but you need to be aware of paying tax on savings when retired in the UK when those savings are in pensions. You can take your pension, but if you do, both your pension income and your employment income, if you continue to work after you’ve reached state pension age, are taxable. But while any income above your tax and savings allowance is susceptible to income tax, you don’t have to pay National Insurance.

Although pension contributions are taxable, you can claim tax relief. In terms of reducing income tax on UK pension contributions. Basic rate taxpayers can claim 20% relief, higher rate taxpayers can claim 40%, and additional rate taxpayers can claim 45%.

With workplace pensions, your employer automatically claims the first 20%, so you don’t need to claim it yourself. But you do need to claim relief on contributions above 20%, so it is imperative to fully understand pension tax relief for high earners.

You make pension contribution tax relief claims by completing a self-assessment tax return. If you have to complete a self-assessment form, you need to be aware of the UK tax year dates 2025.

Employers can use one of two methods for dealing with pension contribution tax relief – relief at source or paid gross. Either way, they will automatically claim the first 20% on your behalf. In Scotland, the same relief structure applies and that if you are a 19% basic rate taxpayer, your employer will still claim a 20% pension contribution tax relief.

Pay attention also to this questions

• ISAs and inheritance tax although it is outside of the question of “When do you pay tax on savings in ISAs” it is relevant to others if they inherit money from your ISA after your death. If the beneficiary is someone other than your spouse or partner, there is no escape; they will have to pay any tax due.
• Pension scams the risk of being scammed by unscrupulous individuals or companies who are out to steal your pension savings is high. To ensure you are dealing with a legitimate person or business, ensure they are authorised and regulated by the FCA (Financial Conduct Authority). It’s also a good idea to ensure that whatever savings account you use has FSCS (Financial Services Compensation Scheme) protection.

Having read through this article, we hope that you are now fully aware of the relevant issues implied by the question about taxation and that you appreciate exactly how your savings income could be taxed.

Pay attention to be very wary when speaking to anybody about your pension, regardless of the nature of the discussion. If the Financial Conduct Authority does not regulate whomever you are communicating with, do not follow their advice; better still, don’t speak to them in the first place.

Frequently Asked Questions