Do I Have to Pay Tax on Savings And Why?

Why Savings Can Be Taxed?

Many people think the money in their bank or savings account is safe from tax.

But in the UK, interest earned on savings is treated as income.

This means it may count towards your total taxable income and could be taxed depending on your situation.

The main types of savings that can be taxed are:

Not all savings are taxed the same way, and there are ways to reduce or avoid paying tax legally.

The UK has personal allowances and specific rules for savings income:

Personal Allowance – Everyone gets £12,570 tax-free income per year (2025/26). Savings interest counts towards this total.
Starting Rate for Savings – If your income is below £17,570, the first £5,000 of savings interest may be tax-free.
Savings Allowance – Basic rate taxpayers can earn up to £1,000 in interest tax-free; higher rate taxpayers up to £500.
Additional Rate Taxpayers – No savings allowance; all interest is taxable above your personal allowance.

Example:
If you earn £40,000 a year and receive £600 interest from savings, it falls within your £1,000 savings allowance, so you won’t pay tax.

But if your interest exceeds £1,000, the extra is taxed at your income tax rate.

Use ISAs (Individual Savings Accounts)
All interest earned in a Cash ISA or Stocks & Shares ISA is tax-free. This is the easiest way to save without worrying about tax.
Spread Savings Across Accounts
If you’re close to the allowance limits, consider splitting savings between different accounts or family members to maximise tax-free interest.
Check Tax Codes and Allowances
Make sure your bank is applying the correct tax code. Incorrect codes can mean unnecessary tax is deducted.

Do I have to pay tax on my savings?
It depends on your total income and how much interest your savings generate. Small amounts may fall within tax-free allowances.
Are ISAs really tax-free?
Yes. Any interest or gains from ISAs are not taxed, and you can use them to shelter your savings.
What happens if I exceed my allowance?
Interest above the savings allowance is taxed at your income tax rate. Your bank may automatically deduct it, or HMRC may adjust it via self-assessment. Consider other long-term investments.

Can children’s savings be taxed?
Yes, but there are specific rules for children’s accounts. Usually, interest over £100 per child is taxable if it is given to them by parents or guardians.
Does interest from bonds or gilts count?
Yes, certain bonds and gilts generate taxable interest unless they are held in an ISA.