Tax on savings income

Introduction

When you put your money into a bank or building society account, it may earn interest. Interest is money the bank or building society pays you in recognition of the fact that they hold (and have use of) your money.

Interest normally counts as income for tax purposes on the date it is credited to your account. But we explore this point in more detail under the heading ‘When interest arises for tax purposes’ below. Most bank and building society income is taxable, but some is not (like interest earned in an ISA).

Normally, we might think of ‘income’ as something that is ‘earned’ – for example, income from your job or from self-employment. However, bank or building society interest is a form of passive (or ‘unearned’) income. It is taxed differently from earned income.

Allowances and nil-rate bands

If you have taxable savings income, there are three main allowances and nil-rate bands which can apply before you would normally owe any tax on that income. These should be considered in the following order:

1. The personal allowance (£12,570 for 2026/27): this is deducted from your taxable income before tax is calculated. If you are eligible for the blind person’s allowance, this is treated in the same way.
2. The starting rate limit for savings (£5,000 for 2026/27): this is a nil-rate band which applies only to savings income. It only applies if your non-savings and non-dividend income is below a certain threshold.
3. The personal savings allowance (also known as PSA) (£1,000 for basic-rate taxpayers): this is a further nil-rate band which applies only to savings income.

The above allowances and nil-rate bands together mean that, for 2026/27, if you have total taxable income of no more than £18,570, then you would generally not owe any tax on your savings income for that year (even if it was more than £1,000).

If you have non-savings income (for example, employment income or pension income) of more than £17,570 for 2026/27 and you are a basic-rate taxpayer for that year, you would generally only owe tax on your savings income if it exceeds £1,000.

Bank account ‘rewards’

The personal savings allowance applies only to savings income as defined by law. This means that even if you receive income that you think of as savings income, if it is not within the definition, it is not eligible for the personal savings allowance. Equally, it is not eligible for the starting rate of savings.

The situation can be very confusing in relation to certain types of ‘reward’ accounts which banks may offer. If you receive any interest (whether on the reward account or on a different account), you should receive that gross and it will be eligible for the personal savings allowance. The treatment of ‘rewards’ however depends on the nature of the reward. It is very possible that you will receive the reward net of 20% tax. In addition, the reward may not be eligible for the personal savings allowance. There is often limited guidance available from the bank, and the nature of the reward can vary from account to account.

Please note that we are talking about regular cash rewards here as opposed to cash incentives for people switching their accounts or cashback on certain types of spending, which are generally not taxable as they are considered a 'discount' rather than a reward.

If you have a reward account, to check the tax position, you need to find out the following information:

• the type of reward
• whether the bank pays you the reward gross or net of tax (and if net, how much tax is deducted at source)
• whether the reward is taxable income
• whether the reward is potentially eligible for the personal savings allowance, depending on your circumstances

There are three main possible tax treatments, depending on the type of reward:

1. If the reward takes the form of interest (that is, a rate based on the account balance), it is savings income and eligible for the personal savings allowance. Banks should pay this to you gross without deducting 20% tax at source, but it is still taxable income.
2. If the reward takes the form of a cash reward (not related to the account balance), for say depositing a certain amount per month, this is not savings income, but is probably an ‘annual payment’ (applicable even if the reward is paid monthly). Banks must deduct tax at 20% before paying you the cash reward, and the gross amount of the cash reward is taxable. Since annual payments are not savings income, these types of rewards are not eligible for the personal savings allowance (or the starting rate for savings). If you are not liable to tax you can reclaim any tax deducted by completing an R40 form or on your self assessment tax return. If you are a higher-rate taxpayer you would need to pay the extra tax due to HMRC, for example, via a PAYE coding adjustment or through your tax return.

If the reward takes the form of a cash reward (not related to the account balance) and there is a fee for the account, the reward does not meet the conditions for an annual payment. It is still taxable, however as miscellaneous income. Banks do not have to deduct tax before paying you the cash reward, so you receive these rewards gross and the gross amount is taxable. These types of rewards are not savings income, so they are not eligible for the personal savings allowance (or the starting rate for savings). However, depending on your other sources of income, you may be able to use the trading allowance against this miscellaneous income. If you are a basic, higher-rate or additional-rate taxpayer you would need to pay any tax due to HMRC, for example, via a PAYE coding adjustment or through your tax return.

Tax rates

If you still have taxable savings income after deducting the personal allowance and any available nil-rate bands (under the starting rate for savings and the personal savings allowance), then you would usually have a tax liability on that income at the rates which apply for savings income.

For 2026/27, these are the same as the UK rates for earned income:

1. The basic rate (20%)
2. The higher rate (40%)
3. The additional rate (45%)

The rate which applies depends on where the taxable savings income falls in your ‘stack’ of taxable income. For more information on this, see our main Income tax page.

If you are a Scottish or Welsh taxpayer, you pay tax according to UK rates and bands on your savings income.

There will also be a change to the current ordering rules that will mean the personal allowance and other reliefs are set against income which is not property, savings or dividend income first. For more information on this, see our main income tax page.

Deduction of tax at source

Banks and building societies do not now generally deduct any tax at source from bank interest – it is paid gross.

The personal savings allowance means that paying interest gross delivers the right tax result in many cases. However, some people may need to notify HMRC about their untaxed, taxable savings interest.

If you owe tax on your savings income

If you owe tax on your bank and building society interest, and if you normally complete a tax return, then you can include the amount of savings income in the relevant section of the return.

If your interest income is £10,000 or more, HMRC say you need to complete a self assessment tax return - even if you have no other reason to do so. You can read about HMRC’s self assessment criteria on our page Who has to complete a tax return.

If you do not normally complete a tax return, and your interest is less than £10,000, you should try and tell HMRC about the taxable income by 5 October after the end of the tax year in which it arose (so 5 October 2026 for the tax year ending 5 April 2026). If they can, HMRC will take the extra tax you owe from your wages/private pension income by changing your pay as you earn (PAYE) code. 

If you do not pay tax under PAYE, or if they cannot adjust your tax code for any reason, or use data they already have to send you a bill at the end of the tax year (as described below), HMRC may ask you to fill in a tax return.

If you do not give HMRC information about your interest by contacting them, HMRC use information provided to them directly by banks and building societies about any savings interest income you receive. They may use this to send you a bill at the end of the tax year (the P800 form or simple assessment) and/or to amend your tax code. 

Bank interest errors

HMRC’s savings interest figures are a useful starting point, but they may not always be accurate and should not be treated as definitive. Ultimately, you are responsible for ensuring that the correct amount of taxable savings income is reported. The fact that HMRC receives information from banks and building societies does not remove the obligation on you to notify them of your need to do a self assessment tax return, where appropriate.

You should therefore check the figure on any P800 or simple assessment very carefully, as the amount can be incorrect. For example, the figures for joint accounts may not be reported correctly (especially if the account is not held in equal shares), estimated amounts from prior years may be rolled forward, or figures can even be duplicated. If you are unsure, you should ask HMRC for a breakdown.

If you think the interest shown in your tax calculation may be wrong, you should contact HMRC as soon as possible.

HMRC will ask you to explain why you think the figures are incorrect and may ask you to send evidence of the correct amounts, such as copies of interest certificates. HMRC may agree to issue a revised tax calculation. In certain situations, they may ask you to contact the bank or building society concerned to discuss the data they have shared with HMRC and why it may not be correct.

When interest arises for tax purposes

Interest is taxable in the tax year in which it arises.

Normally, interest arises in the tax year in which it is credited into your account. However, this is not always the case. If you are not able to access an account or withdraw the interest, then it does not arise until you are able to do so. Penalties for early access do not prevent the interest counting as having arisen.

We use some examples to illustrate these points.