Quick Summary
- The Personal Savings Allowance is £1,000 for basic rate, £500 for higher rate and £0 for additional rate taxpayers.
- The starting rate for savings can make up to £5,000 more interest tax-free for people on lower incomes.
- Interest in an ISA is always tax-free.
- Scottish taxpayers pay tax on savings at UK rates and bands.
- HMRC usually collects tax on interest through your tax code, unless you file a tax return.
With higher interest rates, many savers who never thought about tax on interest are now going over their allowance. Banks pay interest without deducting tax, so it's up to you to understand whether any is due.
The Personal Savings Allowance
| Income tax band | Tax-free interest |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
The allowance applies to interest from bank and building society accounts, credit unions, government and corporate bonds, and peer-to-peer lending.
The starting rate for savings
If your other income (wages, pension, self-employed profit, rent) is low, you may get up to £5,000 of extra tax-free interest. The £5,000 is reduced by £1 for every £1 of other income above the £12,570 personal allowance, so it disappears once other income reaches £17,570.
Example
A retired saver has £14,000 of pension income and £4,000 of interest. Their starting rate band is £5,000 − (£14,000 − £12,570) = £3,570. With the £1,000 Personal Savings Allowance on top, all £4,000 of interest is tax-free.
How are Scottish taxpayers taxed on savings?
Scottish income tax rates apply only to earnings, pensions, self-employed profits and rent. Savings interest is taxed at UK rates: 20% basic, 40% higher and 45% additional, using the UK bands. Whether you're a higher rate taxpayer for the Personal Savings Allowance is also worked out using UK bands.
ISAs: always tax-free
You can put up to £20,000 a year into ISAs. Interest, dividends and gains inside an ISA are tax-free and don't count towards your allowances, so moving savings into an ISA is the simplest way to protect interest from tax.
How is the tax collected?
- If you don't file a tax return: banks report interest to HMRC, which usually adjusts your tax code or sends a calculation (Simple Assessment).
- If you file Self-Assessment: include all your interest on your return.
- If your interest is over £10,000: you need to register for Self-Assessment.
Check any tax code or calculation from HMRC carefully — estimates based on the previous year's interest can be wrong when rates or balances change.
Ways to reduce tax on savings
- Use your ISA allowance each year
- Spouses can hold savings in the name of the lower earner
- Premium Bond prizes are tax-free
- Pension contributions can bring you back into the basic rate band, doubling your allowance
Frequently Asked Questions
How much savings interest can I earn tax-free?
Basic rate taxpayers can earn £1,000 of interest tax-free, higher rate taxpayers £500 and additional rate taxpayers nothing. People on low incomes may also get up to £5,000 under the starting rate for savings.
Do Scottish taxpayers pay Scottish rates on savings interest?
No. Savings interest is taxed at UK rates (20%, 40% and 45%) using UK bands, even for Scottish taxpayers.
Do I need to tell HMRC about my savings interest?
Usually not if you don't file a tax return, because banks report interest to HMRC. If you file Self-Assessment, include it on your return, and if your interest is over £10,000 you must register.
Is ISA interest taxable?
No. Interest, dividends and gains within an ISA are tax-free and don't need to be reported.
What is the starting rate for savings?
Up to £5,000 of interest taxed at 0% for people whose other income is below £17,570. It's reduced by £1 for every £1 of other income above the personal allowance.
Unsure What You Owe on Your Savings?
We'll check your interest against your allowances and make sure HMRC has your tax code right.
Sardar Muhammad, AAT
Sardar is the founder of LimeTree Accounting Solutions, an AAT-accredited practice in Govanhill, Glasgow. He works with sole traders, tradespeople, landlords and small limited companies across Glasgow and Clydebank.
This guide is general information based on UK and Scottish tax rules as at 13 October 2026. It is not personal advice. Rates and thresholds change, so speak to us about your own situation.