Tax on your savings interest: how much can you actually earn before HMRC takes an interest?
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There is a risk to your capital and you may not get back the full amount invested. The value of investments, as well as the income from them, can fall as well as rise.
For most of the 2010s, tax on savings interest was a problem almost nobody had. Rates were so low that you could hold a substantial sum in a deposit account and still not trouble your allowance. That has changed. Interest rates have been at levels not seen for years, and a good many people who have never filled in a tax return are now getting letters about interest they did not realise was taxable.
The allowance doing the work here is the Personal Savings Allowance, and it has not moved since it was introduced in 2016. Everything around it has.
How the allowance works
If you are a basic rate taxpayer, the first £1,000 of savings interest you receive in a tax year is free of income tax. Higher rate taxpayers get £500. Additional rate taxpayers, meaning those with income above £125,140, get nothing at all. Interest above your allowance is taxed at your normal rate, and HMRC usually collects it by adjusting your tax code rather than sending a bill.
Two things about that are easy to miss. The first is that the allowance belongs to you, not to your household, so a married couple or civil partners each have their own. The second is how quickly it can be used up at current rates. A basic rate taxpayer with around £22,000 in an account paying 4.5% would use the whole £1,000. A higher rate taxpayer would get through the £500 with roughly half that balance. Neither of those is an unusual amount for someone holding an emergency fund.
The allowance people forget
There is a second, more generous allowance sitting underneath it, and it is routinely overlooked. The starting rate for savings lets you receive up to £5,000 of interest taxed at 0%, on top of the Personal Savings Allowance. The catch is that it only helps if your other income is low. For every pound of non-savings income above the £12,570 personal allowance, the £5,000 band shrinks by a pound, and once your other income reaches £17,570 it has gone entirely. At Budget 2025 the government confirmed the starting rate stays frozen at £5,000 until April 2031.
Take Bernard, 68, a fictional client whose position comes up more often than you would expect. He has a modest pension of around £14,000 a year and a lump sum of cash sitting in the bank after downsizing. Because his pension income is below £17,570, part of the starting rate band is still available to him, and that sits on top of his Personal Savings Allowance. Several thousand pounds of interest could reach him without tax. His wife, still working and paying higher rate tax, is in a completely different position with the same money in the same account.
That contrast is the point. Two people can hold identical savings and have entirely different tax outcomes, and which of you holds an account can matter as much as which account you choose.
Where ISAs come in, and where they do not
Interest inside an ISA is free of income tax however much of it there is, and it does not use up your Personal Savings Allowance. The annual ISA allowance is £20,000 across all ISA types for the 2026/27 tax year, and it does not roll over, so an unused allowance is simply gone on 6 April. There is a change coming too: from 6 April 2027 the amount of that £20,000 you can put into a cash ISA falls to £12,000 if you are under 65, with the full £20,000 retained for those aged 65 and over.
None of which makes an ISA automatically the right home for your money. A cash ISA sometimes pays a lower rate than the best ordinary account, and if your interest sits comfortably within your allowances, the tax shelter is not buying you anything this year. A stocks and shares ISA gives money more room to grow over the long term, but the value can fall as well as rise and you could get back less than you put in, which makes it a poor fit for money you may need soon. Sheltering cash you will spend in six months is a very different decision from investing money you will not touch for ten years.
Keep half an eye on how much you hold in cash overall, too. Deposits are safe in nominal terms, but with inflation running above the Bank of England's 2% target, cash sitting still for years tends to lose buying power even when the interest looks respectable.
In summary
Higher interest rates have turned savings tax from a technicality into something that affects ordinary savers. The Personal Savings Allowance has not risen since 2016, the starting rate for savings is frozen until 2031, and both are far easier to use up than they were a few years ago. Knowing which allowances you have, and who in a household should be holding which account, usually matters more than chasing the last fraction of a percent on the rate.
If you are not sure how much of your savings interest is actually taxable, or whether your money is sitting in the right place between you and your partner, we can help you work it through. Give the ACJ team a call and we will take a proper look at it with you.