Are Savings Accounts Taxed? A Complete Guide for UK Taxpayers

Saving money is one of the smartest financial habits you can build, but many people often wonder: are savings accounts taxed in the UK? The short answer is yes, savings interest can be taxed, but there are generous allowances and tax-free savings options that mean many people won’t actually pay any tax on their savings income.

This guide will walk you through how savings interest is taxed, the role of the personal savings allowance, the different tax rules depending on your income tax band, and how to make the most of tax-free savings accounts like ISAs. We’ll also explain when you may need to declare interest to HMRC through a tax return and how much tax you might owe if your interest exceeds your allowance.

Understanding How Savings Accounts Are Taxed

When you put money into a savings account, the bank or building society pays you interest on your deposit. This interest counts as part of your savings income and is potentially subject to UK tax.

However, thanks to the personal savings allowance (PSA) and other reliefs, most UK taxpayers can earn a significant amount of interest without paying tax.

What Is the Personal Savings Allowance?

The personal savings allowance was introduced by the UK Government in 2016 to help savers keep more of their money. It allows taxpayers to earn a certain amount of interest on savings each tax year without having to pay tax on it.

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For example, if you are a basic rate taxpayer earning £800 in interest in a tax year, this falls within your personal savings allowance. That means you do not need to pay any tax on it. But if you earn £1,200 in interest, the extra £200 exceeds your personal savings allowance and will be taxed.

The Starting Rate for Savings

In addition to the PSA, there is a special rule called the starting rate for savings. If your total income (wages, pension, etc.) is below your personal allowance plus £5,000, you may qualify for this starting rate, which allows you to earn up to £5,000 in savings interest without paying tax.

This is especially useful for low-income earners or retirees who rely heavily on interest income.

Do You Need to Pay Tax on Your Savings?

Whether or not you’ll pay tax on savings depends on:

1. How much interest you earn
2. Your income tax band
3. Whether your interest exceeds your allowance

If the amount of interest you receive is higher than your PSA or the starting rate for savings, then you may owe tax.

For instance:

• A basic rate taxpayer earning £1,500 in interest would pay tax on £500.
• A higher rate taxpayer earning £1,200 in interest would pay tax on £700.

How HMRC Collects Tax on Savings Interest

Unlike in the past, banks and building societies no longer deduct tax at source. Instead, the interest you earn is paid without tax being deducted, and HMRC calculates how much tax (if any) you owe.

HMRC may:

• Adjust your tax code so the tax is collected automatically through PAYE.
• Send you a tax calculation letter if you need to make an additional payment.
• Require you to submit a self-assessment tax return if your savings income is high or if you live outside the UK and have UK savings accounts.

This system ensures that only taxpayers who actually exceed their allowance need to pay any tax.

Tax-Free Savings Accounts: The Role of ISAs

One of the best ways to grow your savings without paying tax is through an Individual Savings Account (ISA).

With ISAs, all the interest you earn is completely tax-free, regardless of your income tax band or the amount saved. The UK Government sets a yearly ISA allowance, which is currently £20,000 per tax year.

There are different types of ISAs, including:

• Cash ISAs – tax-free interest on savings.
• Stocks and Shares ISAs – tax-free returns on investments.
• Innovative Finance ISAs – for peer-to-peer lending.
• Lifetime ISAs – designed for first-time home buyers and retirement savings.

If you want to build your savings pot while avoiding tax on interest altogether, ISAs are one of the best options.

Joint Accounts and Savings Tax

If you have a joint savings account, the interest earned is usually split 50/50 between both account holders. Each person can use their personal savings allowance against their share of the interest.

For example, if a joint account earns £1,200 in interest, each person is treated as earning £600. If both are basic rate taxpayers, the interest would fall within their PSA, and no tax would be due.

National Savings and Investments (NS&I)

Some National Savings and Investments (NS&I) products, such as Premium Bonds, also allow you to earn tax-free interest or returns. These are backed by the UK Government, making them a safe option for savers who want to avoid paying tax on savings income.

Declaring Savings Interest to HMRC

In most cases, HMRC will automatically adjust your tax code so you don’t have to manually declare interest. However, you may need to file a self-assessment tax return if:

• You are self-employed or have complex finances.
• You earn a large amount of savings interest.
• You live outside the UK but have UK savings accounts.
• You need to declare other forms of income from savings and investments.

Managing tax returns can feel overwhelming, especially if you’re unsure how much interest to declare or whether you’ve overpaid tax. This is where professional support can make a difference. Services like Cloud Co Books specialise in helping individuals and businesses manage their accounts, file tax returns accurately, and ensure you don’t pay more tax than you owe. Working with experts can save time, reduce errors, and give you peace of mind that your finances are fully compliant with HMRC requirements.

Capital Gains Tax vs. Tax on Savings

It’s important not to confuse capital gains tax with tax on savings. Capital gains tax applies when you sell an asset (like shares or property) at a profit, while tax on savings applies to the interest you receive from your savings accounts.

Both fall under UK tax rules, but they are treated differently by HMRC.

How to Maximise Your Savings Without Paying Tax

Here are some practical tips to reduce or eliminate tax on your savings:

1. Make full use of your ISA allowance: Shelter up to £20,000 each tax year in tax-free savings accounts.
2. Split savings with your partner: If one of you is a lower-rate taxpayer, hold more savings in their name.
3. Choose tax-free product: Such as ISAs, Premium Bonds, or other qualifying NS&I accounts.
4. Monitor your savings interest: Estimate how much you’ll earn to avoid exceeding your PSA unexpectedly.
5. File a tax return if necessary: Ensure HMRC has the correct figures so you don’t overpay or underpay.

Final Thoughts

So, are savings accounts taxed? The answer depends on how much interest you earn, your tax band, and whether it exceeds your personal savings allowance.

For many UK taxpayers, savings accounts remain an excellent way to grow money without paying tax, thanks to the PSA, ISAs, and starting rate for savings. But if you have a large savings pot or are a higher-rate taxpayer, you may still need to pay tax on savings interest and possibly declare it to HMRC.

The good news is that with proper planning, you can maximise tax-free savings and keep more of your hard-earned money working for you.