Tax on Savings Interest in 2026-27: Allowances, Rates and Examples

Interest on savings held outside an ISA is taxable income, but it can fall into as many as three bands taxed at 0% before any tax is due. Banks and building societies have paid interest without taking tax off since 6 April 2016, and after each tax year they tell HMRC what they paid you.

How much savings interest can you earn tax-free?

• Personal allowance: any of the £12,570 allowance that your earnings, pension and other income leave unused also covers interest.
• Starting rate for savings: up to £5,000 of interest at 0%. Every £1 of earnings, pension or other non-savings income above the personal allowance reduces it by £1, so it has gone once that income reaches £12,570 plus £5,000.
• Personal savings allowance: a further £1,000 at 0% for a basic-rate taxpayer, £500 for a higher-rate taxpayer, and nothing for an additional-rate taxpayer. Your band is set by your total income, including the interest itself.

Interest earned inside an ISA is free of tax and uses none of these.

In what order is income taxed?

Income is taxed in layers. Earnings, pensions, rent and trading profits are taxed first, savings interest sits on top of them, and dividends go on top of both. So the rate on your interest depends on how much of the £37,700 basic-rate band your other income has left. Interest taxed at 0% under the starting rate or the personal savings allowance still takes up room in that band.

From 6 April 2027 the personal allowance and other reliefs must be set against earnings, pensions and trading income first, then rent, then savings and then dividends, instead of wherever they would save the most tax.

What changes from April 2027?

From 6 April 2027 savings income has its own rates, 2 points above the rates on earnings: 22% in the basic-rate band, 42% in the higher-rate band and 47% in the additional-rate band, instead of 20%, 40% and 45%. The change is law, in Finance Act 2026. The 0% bands stay: the starting rate limit is set at £5,000 for every year to 2030-31, and no change to the personal savings allowance has been announced. Savings income is taxed at UK rates wherever you live in the UK, so the rise applies in Scotland too.

Three savers with round numbers, on the same income in 2026-27 and in 2027-28:

• Salary £40,000, interest £3,000. The salary uses the £12,570 personal allowance and £27,430 of the £37,700 basic-rate band, which rules out the starting rate. The personal savings allowance covers £1,000 and the other £2,000 is taxed: £2,000 × 20% = £400 in 2026-27, and £2,000 × 22% = £440 in 2027-28.
• Pension £14,570, interest £6,000. £2,000 of the pension is taxable, so the starting rate covers £5,000 less £2,000, which is £3,000 of interest, and the personal savings allowance another £1,000. The last £2,000 is taxed: £400 in 2026-27 and £440 in 2027-28.
• Salary £60,000, interest £3,000. This is a higher-rate taxpayer, so the personal savings allowance is £500 and £2,500 is taxed: £2,500 × 40% = £1,000 in 2026-27, and £2,500 × 42% = £1,050 in 2027-28.

How do ISAs fit in, and what is changing?

You can pay up to £20,000 a year into ISAs, and the interest they earn is never taxed. The government has announced that from 6 April 2027 savers under 65 will be able to put no more than £12,000 of that into cash ISAs each year, while savers aged 65 and over can still put the whole allowance into cash. The change is being made through ISA regulations rather than the Finance Act.

How is the tax collected?

HMRC usually collects tax on interest by changing your tax code, using the figures your bank sends after the tax year ends, or through your Self Assessment return if you already file one. If your bank reports more than £10,000 of interest, HMRC will ask you to file a return. CoreFi's Budget page works out what the April 2027 rise costs you from your own interest and income.

Which accounts suit your savings depends on your circumstances, and a qualified adviser can advise.