How savings interest is taxed in 2026/27
Interest from bank and building society accounts, fixed-rate bonds, peer-to-peer loans and most other savings outside an ISA is taxable income. In 2026/27 it is taxed at your normal income tax rate, 20%, 40% or 45%, but only after two tax-free amounts: the Personal Savings Allowance of £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers, and the starting rate for savings, which gives up to £5,000 of interest at 0% to people with low earnings or pension income. Over 90% of taxpayers pay no savings tax, but with interest rates still around 4% and the allowances unchanged since 2016, more savers cross the line every year.
From 6 April 2027 savings interest gets its own rates, two points above the rates on wages: 22%, 42% and 47%. This guide explains who pays tax on interest now, how HMRC collects it, how much the April 2027 change costs and what the cash ISA cut to £12,000 from the same date means for where you keep your money.
The two tax-free amounts
Personal Savings Allowance
| Your income tax band | Personal Savings Allowance | Savings at 4% interest before tax is due |
|---|---|---|
| Basic rate (taxable income up to £50,270) | £1,000 | £25,000 |
| Higher rate (£50,271 to £125,140) | £500 | £12,500 |
| Additional rate (over £125,140) | £0 | £0 |
The band is decided after adding the interest to your other income, so £1,000 of interest on top of a £49,800 salary pushes you into the higher-rate band and cuts the allowance to £500. The bands are frozen until April 2031, so pay rises alone move people from £1,000 to £500.
Starting rate for savings
If your non-savings income (wages, pensions, rental profit) is below £17,570, you also get up to £5,000 of interest at 0%. The £5,000 shrinks by £1 for every £1 of non-savings income above the £12,570 Personal Allowance. Someone with a £14,000 pension has £3,570 of starting rate left, plus the £1,000 Personal Savings Allowance, so £4,570 of interest is tax-free. Someone with no income other than interest can receive £12,570 plus £5,000 plus £1,000, which is £18,570 of interest, without paying any tax at all.
This matters for pensioners: the full new State Pension is £12,547.60 in 2026/27, which leaves the whole £5,000 starting rate intact. From April 2027 it rises to £13,036.40, so the starting rate drops to £4,533.60. Our State Pension April 2027 guide covers the increase.
How HMRC collects tax on interest
Banks and building societies report the interest they pay to HMRC after the end of each tax year. You do not need to do anything if you are employed or receive a pension through PAYE: HMRC adjusts your tax code to collect the tax, usually in the following year and based on an estimate of what you will earn in interest. If the estimate is wrong you can ask HMRC to change it through your personal tax account. People with no PAYE income receive a Simple Assessment letter and pay directly. Anyone with more than £10,000 of interest must register for Self Assessment, and people who already file declare interest on the return.
Check your coding notice. A common error is a savings estimate carried forward from a year when rates were higher or a bond matured, which takes too much tax from your pay until it is corrected.
Worked examples for 2026/27
- Basic-rate saver. Tom earns £32,000 and has £40,000 in an easy-access account at 4%, giving £1,600 of interest. The first £1,000 is covered by the allowance; the remaining £600 is taxed at 20%, so he pays £120.
- Higher-rate saver. Aisha earns £60,000 and has the same £1,600 of interest. Her allowance is £500, so £1,100 is taxed at 40% and she pays £440. Moving £25,000 of the savings into a cash ISA would remove most of the bill.
- Retired couple. David has a £9,000 pension and his wife Jean has the full new State Pension of £12,547.60. He has £3,570 of Personal Allowance left, £5,000 of starting rate and £1,000 of Personal Savings Allowance, so his first £9,570 of interest is tax-free. Jean has £22.40 of Personal Allowance left, the full £5,000 starting rate and the £1,000 allowance, so £6,022.40 of interest is tax-free. Holding £150,000 of savings at 4% produces £6,000 of interest, which is tax-free in either name, but Jean has only £22.40 of room to spare while David could receive another £3,570 before paying anything, so the larger balances belong with him.
Use the take-home pay calculator to check which band your salary puts you in before you work out your allowance.
What changes on 6 April 2027
Budget 2025 introduced separate rates for savings income from 2027/28, legislated in Finance Act 2026: the savings basic rate becomes 22%, the savings higher rate 42% and the savings additional rate 47%. The House of Commons Library briefing notes that the Personal Savings Allowance, the starting rate for savings and the £12,570 Personal Allowance are all unchanged, so the extra tax falls only on interest that is already taxable. Property income moves to the same 22%, 42% and 47% rates on the same date, and dividend rates rose by two points to 10.75% and 35.75% in April 2026.
| Taxable interest after allowances | Tax in 2026/27 | Tax in 2027/28 | Extra |
|---|---|---|---|
| £600 for a basic-rate taxpayer | £120 | £132 | £12 |
| £1,100 for a higher-rate taxpayer | £440 | £462 | £22 |
| £5,000 for a higher-rate taxpayer | £2,000 | £2,100 | £100 |
| £10,000 for an additional-rate taxpayer | £4,500 | £4,700 | £200 |
The extra is 2% of taxable interest, so for most people it is tens of pounds. The bigger issue is timing. Interest on a fixed-rate bond is taxed in the year it becomes available to you, so a two-year bond opened now that pays all its interest at maturity in 2028 is taxed at 22% on the whole amount in 2028/29, and the lump may also push you over the £1,000 allowance in that year. A bond that pays interest annually spreads it across years and rates.
The cash ISA limit falls to £12,000
From 6 April 2027 the amount an adult under 65 can put into cash ISAs each year is reduced to £12,000. The overall ISA allowance stays at £20,000, so the other £8,000 can still go into a stocks and shares ISA, an Innovative Finance ISA or a Lifetime ISA, and people aged 65 and over keep the full £20,000 for cash. Money already inside a cash ISA is unaffected, and so are transfers between providers.
For anyone with taxable interest the practical response is to use the full £20,000 cash allowance in 2026/27, before the cut, and to move existing taxable savings into an ISA where the interest rate is comparable. Our cash ISA guide and stocks and shares ISA guide compare the options, and Premium Bonds remain tax-free with a £50,000 limit for people who have filled their ISA.
Ways to cut the tax on your savings
- Fill ISAs first. Interest inside a cash ISA is never taxed, never reported and does not count towards your income for the Personal Savings Allowance, Child Benefit or the £35,000 Winter Fuel Payment test.
- Hold savings in the lower earner's name. Couples are taxed individually, so savings held by a basic-rate or non-taxpaying partner use their allowances. Joint accounts split interest 50/50.
- Use the starting rate in retirement. Income from drawdown is non-savings income and eats into the £5,000; interest does not. Taking a smaller pension drawdown in a year of high interest can keep more of the starting rate.
- Watch the band edge. If interest tips you from basic to higher rate you lose half the allowance as well as paying 40% on the top slice. A pension contribution or Gift Aid donation extends the basic-rate band and can restore the £1,000.
- Choose how fixed-rate interest is paid. Annual interest spreads the tax; interest at maturity concentrates it, and from 2027 at the higher savings rates.
- Children's savings. Interest over £100 a year on money given by a parent is taxed as the parent's; a Junior ISA avoids that.
The Smart Money guides cover each of these wrappers in detail.
Frequently asked questions
How much interest can I earn tax-free in 2026/27?
£1,000 if you are a basic-rate taxpayer, £500 if you are a higher-rate taxpayer and nothing if you pay additional rate, plus up to £5,000 under the starting rate if your other income is below £17,570. Interest inside ISAs and Premium Bond prizes are tax-free on top.
Do I have to tell HMRC about my savings interest?
Not usually. Banks report it and HMRC adjusts your tax code or sends a Simple Assessment. You must declare it yourself if you file a Self Assessment return, and you must register if your interest is over £10,000.
What is the tax rate on savings interest from April 2027?
22% for basic-rate taxpayers, 42% for higher-rate taxpayers and 47% for additional-rate taxpayers, applied only to interest above your allowances.
Does the Personal Savings Allowance change in April 2027?
No. It stays at £1,000, £500 and £0. The starting rate for savings also stays at £5,000.
Can I still put £20,000 into a cash ISA?
Yes, until 5 April 2027. From 6 April 2027 the cash limit is £12,000 for under-65s, with the remaining £8,000 of the £20,000 allowance available for other ISA types.