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The taxation of savings income in the UK is influenced by various allowances and tax bands, which can make it seem complex. However, understanding how these reliefs work together can help individuals plan their finances to reduce or avoid tax on savings interest. This guide explains how savings income is taxed in 2025/26, what allowances apply, and how people can effectively use them.
1. Personal Allowance
Every UK taxpayer receives a personal allowance of £12,570 in 2025/26. This allowance is used first to cover any income, such as earnings, pensions, or interest from savings.
However, the allowance is tapered once adjusted net income exceeds £100,000. It is reduced by £1 for every £2 of income above that level, meaning there is no personal allowance if your adjusted income reaches £125,140 or more.
2. Marriage Allowance
Where one spouse or civil partner earns less than the personal allowance and does not use it fully, they can transfer up to £1,260 of unused allowance to their basic-rate taxpaying partner. This increases the recipient’s personal allowance to £13,830, which can help shelter more savings income from tax.
3. Personal Savings Allowance
The Personal Savings Allowance (PSA) enables most taxpayers to earn a portion of interest on savings tax-free, in addition to their personal allowance.
- Basic-rate taxpayers can earn up to £1,000 of interest tax-free.
- Higher-rate taxpayers are entitled to £500.
- Additional-rate taxpayers receive no PSA.
This allowance applies solely to interest from savings and does not cover dividend income or other investment returns.
4. Starting Rate for Savings
In addition to the personal allowance and PSA, individuals may benefit from the starting-rate band for savings, which applies a 0% tax rate on up to £5,000 of savings interest. However, this is only available if taxable non-savings income is less than £17,570.
The band is reduced pound for pound by the amount of taxable non-savings income above the personal allowance. Once your non-savings income exceeds £17,570, the starting-rate band is completely withdrawn.
5. How the Allowances Work Together
If your only income is from savings, you can potentially earn up to £18,570 tax-free in 2025/26:
- Personal allowance: £12,570
- PSA: £1,000 (if a basic-rate taxpayer)
- Starting-rate band: £5,000
If eligible for the marriage allowance, this could increase to £19,830. These figures assume no other taxable income that would reduce entitlement to the savings starting-rate band.
6. Examples of Savings Tax Calculations
Example 1: Low Income and Full Reliefs
Albert has a pension of £14,000 and savings interest of £3,000.
- Personal allowance covers £12,570 of pension.
- The remaining £1,430 of pension reduces his starting-rate band to £3,570.
- His savings interest of £3,000 falls fully within this band and is taxed at 0%.
Result: No tax on savings income.
Example 2: Partially Taxable Interest
Brian earns £15,000 from part-time work and receives £4,750 in savings interest.
- £12,570 of income is covered by the personal allowance.
- £2,430 of taxable income reduces the starting-rate band to £2,570.
- First £2,570 of interest taxed at 0%.
- Next £1,000 covered by PSA.
- Remaining £1,180 taxed at 20% = £236.
Result: Brian pays tax only on £1,180 of his savings income.
Example 3: Impact of Moving into a Higher Tax Band
Christine received £1,500 in interest both in 2024/25 and 2025/26.
- In 2024/25, she was a basic-rate taxpayer and had a £1,000 PSA. Only £500 taxed at 20% = £100.
- In 2025/26, a pay rise pushed her into the higher rate. PSA drops to £500. Now £1,000 is taxed at 40%, resulting in £400.
Result: Same interest income, but tax increases by £300 due to a change in tax band.
Example 4: Higher Interest Rates Push Income Over Allowances
Doris earns £20,000 pension income and has £25,000 in savings.
- In 2024/25, interest at 4% = £1,000, fully covered by PSA.
- In 2025/26, the interest rate increases to 4.8%, resulting in £1,200 interest.
- Only £1,000 covered by PSA. £200 taxed at 20% = £40.
Result: Doris pays tax despite the same savings balance, due to higher interest earned.
7. ISAs: A Tax-Free Alternative
Interest from savings held in an Individual Savings Account (ISA) is always tax-free and doesn’t use up any of the allowances mentioned above. The annual contribution limit for 2025/26 is £ 20,000.
For those likely to exceed the PSA or starting-rate thresholds, especially higher or additional-rate taxpayers, moving savings into an ISA is often a smart strategy to reduce future tax exposure.
8. Planning Considerations for 2025/26
- Inflation and fiscal drag could push more people into higher tax brackets, reducing their PSA or eliminating it.
- Rising interest rates increase savings income, which could unexpectedly trigger tax liabilities.
- Review total income—not just savings—to understand which allowances remain available.
- Spouses should coordinate income and allowances where possible, using the marriage allowance or splitting savings strategically.
The UK tax system provides good benefits for savings income, but these depend on how much you earn in total and how much of that is from non-savings income. As interest rates rise and thresholds remain unchanged, many people who didn’t pay tax on their savings before may have to do so in 2025/26. To avoid this, it’s important to plan. You can achieve this by checking your income levels, utilising ISAs, and considering how to allocate income within your household to maximise savings and keep more income tax-free.