Interest income & taxation in the UK
When do I start paying tax on my interest income from savings & investments?
Interest income from savings and investments can provide a valuable boost to your finances. However, understanding when this income becomes taxable is essential to avoid surprises and ensure compliance with HMRC regulations. Here’s a clear guide to how interest income is taxed in the UK and the thresholds that apply.
What Is Interest Income?
Interest income refers to earnings from:
Savings accounts (e.g., high street banks or online savings platforms).
Fixed-term bonds and ISAs (Individual Savings Accounts).
Investments such as corporate bonds or government gilts.
The Personal Savings Allowance (PSA)
The PSA allows most individuals to earn a certain amount of interest tax-free each year. The allowance depends on your income tax band:
Basic-rate taxpayers (20%): Up to £1,000 interest tax-free.
Higher-rate taxpayers (40%): Up to £500 interest tax-free.
Additional-rate taxpayers (45%): No PSA available.
For example, if you are a basic-rate taxpayer earning £750 in interest during the tax year, it falls within the PSA and is tax-free.
Tax-Free Savings Options
Certain savings and investment accounts offer tax-free interest by design, including:
Cash ISAs: Interest is entirely tax-free, regardless of your income.
Premium Bonds: Prizes won are tax-free.
NS&I Tax-Free Savings Certificates (if still held).
When Do You Start Paying Tax?
You’ll start paying tax on your interest income if:
Your total interest income exceeds your PSA.
You are an additional-rate taxpayer with no PSA.
How Is Interest Taxed?
Once your interest income exceeds the PSA, it is taxed at your marginal rate of income tax:
Basic-rate taxpayers: 20%
Higher-rate taxpayers: 40%
Additional-rate taxpayers: 45%
For example, if you are a higher-rate taxpayer earning £750 in interest:
Tax-free allowance: £500 (PSA).
Taxable interest: £750 - £500 = £250.
Tax due: £250 x 40% = £100.
Reporting and Paying Tax
Most interest income is reported automatically to HMRC by banks and building societies. If your taxable interest exceeds the PSA, it will typically be collected via an adjustment to your tax code. Alternatively, you may need to:
File a Self-Assessment Tax Return: Required if you have significant additional income sources.
Check Your Tax Code: Ensure it reflects your interest income accurately to avoid underpayment or overpayment.
Tips to Minimise Tax on Interest Income
Utilise Tax-Free Accounts: Maximise your ISA allowance (£20,000 per year as of 2025).
Monitor Your PSA: Keep track of interest earned to avoid unexpected tax liabilities.
Split Savings: Consider spreading savings across accounts if you share income with a spouse or partner.
Final Thoughts
Understanding when and how your interest income becomes taxable ensures you stay compliant and make the most of tax-free allowances. With proper planning, you can optimise your savings and investments while keeping your tax bill manageable.
If you need assistance navigating your interest income or have questions about taxation, feel free to reach out. We're here to help you make the most of your finances.