Interest rates in the UK have risen sharply over the past few years, and while that is broadly good news for savers, it has created a new and often overlooked tax challenge. Millions of people who have never previously needed to think about tax on their savings now find themselves earning enough interest to exceed their tax-free allowances.
For most savers, the answer is no, they do not need to tell HMRC about savings interest. Banks report what you earn directly to HMRC, which adjusts your tax code automatically. But there are specific situations where the responsibility falls on you to act: if your total savings income exceeds £10,000, if you already file a Self Assessment return, or if you earn interest from overseas accounts. Getting it wrong can mean backdated bills, interest charges, and penalties. Also, some savers overpay and miss out on refunds they are entitled to claim. This guide explains exactly where you stand.
What Counts as Savings Interest?
Before looking at reporting requirements, it helps to understand what HMRC considers ‘savings interest’ for tax purposes. The following income sources are generally treated as taxable savings interest:
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Interest from current accounts, easy-access savings accounts, and fixed-term bonds at UK banks and building societies
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Interest earned through credit union accounts
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Returns from peer-to-peer lending platforms (where your money earns interest by being lent to individuals or businesses)
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Interest paid on corporate and government bonds held outside tax wrappers
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Certain interest components from life insurance policies and some structured products
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Compensation interest on Payment Protection Insurance (PPI) refunds
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Interest from overseas savings accounts and foreign financial institutions
What does not count and is therefore tax-free with no reporting obligation is interest earned within a Stocks and Shares ISA, a Cash ISA, an Innovative Finance ISA, or a Junior ISA. Interest from some National Savings & Investments (NS&I) products is also exempt, most notably Premium Bond prizes, which are not subject to income tax at all.
For joint accounts, HMRC’s default position is to split the interest equally between account holders, unless you contact them to specify a different arrangement that reflects your actual ownership.
Your Tax-Free Allowances: How Much Can You Earn Before Tax is Due?
The good news is that most UK savers will not owe any tax on their savings interest at all, because several different allowances can combine to create a substantial tax-free buffer.
The Personal Savings Allowance (PSA)
The Personal Savings Allowance, introduced in April 2016, allows most UK taxpayers to earn a set amount of savings interest each year without paying tax on it. The level of your allowance depends on your income tax band:
This means a basic rate taxpayer can receive up to £1,000 in savings interest before a single penny of tax is due. Interest above that threshold is taxed at their marginal rate of 20%.
The Starting Rate for Savings
This is perhaps the least well-known but potentially most valuable allowance available to UK savers with modest incomes. If your non-savings income (wages, pension, rental income, etc.) is below a certain level, you may qualify for an additional 0% tax band of up to £5,000 on savings interest.
The full £5,000 band is available if your other income is at or below the Personal Allowance of £12,570. For every £1 your non-savings income exceeds £12,570, the Starting Rate for Savings reduces by £1. Once your other income reaches £17,570 or above, the allowance disappears entirely.
Combining Allowances: The £18,570 Tax-Free Threshold
For individuals with little or no earned income — retirees who have not yet drawn their pension, stay-at-home parents, or those taking a career break — the potential tax-free interest allowance is considerably higher than most people.
If your only income is from savings, three allowances can stack together:
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Personal Allowance
£12,570
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Starting Rate for Savings
£5,000
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Personal Savings Allowance
£1,000
Combined, this means you could earn up to £18,570 in savings interest in a single tax year without paying a penny of income tax provided you have no other income.
It is also worth noting that married couples or civil partners can each use their own allowances independently, potentially sheltering up to £37,140 in household savings interest between them or more, if their circumstances allow.
How HMRC Finds Out About Your Savings Interest
Since April 2016, UK banks and building societies have been legally required to report the gross interest they pay to customers directly to HMRC at the end of each tax year. So in most cases, HMRC already knows what you have earned before you have given it a second thought.
If you are employed or receiving a pension, HMRC uses this data to adjust your PAYE tax code for the following year, collecting any tax owed through your pay or pension. If your code changes, you will receive a notice of coding letter from HMRC explaining the adjustment you may also notice a slight reduction in your monthly take-home pay as a result.
If you are outside PAYE entirely not employed and not in Self Assessment. HMRC may instead send a P800 tax calculation or Simple Assessment letter setting out what you owe and how to pay it. These are typically issued between June and November after the tax year ends on 5 April.
Important: If you believe you owe tax on savings interest but have not received any communication from HMRC by 31 March following the relevant tax year, you are legally required to contact HMRC yourself. Do not wait.
When You Must Notify HMRC Yourself
While the system is largely automated, there are clear situations where you are personally responsible for taking action. Failing to do so can result in penalties, even if the omission was unintentional.
1. Your Total Savings and Investment Income Exceeds £10,000
If the combined total of your savings interest and other investment income (such as dividends or bond income) exceeds £10,000 in a tax year, you must register for Self Assessment and file a return. Even if you are employed and have never done so before. HMRC cannot collect this amount accurately through a PAYE code adjustment alone.
Given the current interest rate environment, this threshold is more reachable than it might seem. A basic rate taxpayer with £200,000 in savings earning 5% interest would earn £10,000 in interest annually, right at the threshold. If you think you might be close, calculate your annual interest total sooner rather than later.
2. You already file a Self Assessment return
If you file a return for any reason such as self-employment, rental income, company directorship, or earnings over £100,000, you must declare all savings interest on that return. This applies even if your interest falls within your Personal Savings Allowance and no tax is due. The declaration is still required.
3. You Earn Interest from Overseas Accounts
Foreign interest is not reported to HMRC automatically. If you hold savings in an account outside the UKÂ including the Channel Islands or Isle of Man you are responsible for declaring it. As a UK tax resident, you pay UK income tax on worldwide income, and you will almost always need to file a Self Assessment return to report foreign interest, even if the amount is small or covered by your PSA.
The reporting obligation exists regardless of whether any tax is actually owed.
Note: HMRC now receives financial data from over 100 countries through the Common Reporting Standard (CRS), a global framework for automatic exchange of financial account information. If HMRC discovers undisclosed foreign interest before you report it, ‘Failure to Notify’ penalties can apply even when no tax was actually due.
If you have previously overlooked foreign savings interest, the best course of action is to make a voluntary disclosure to HMRC as soon as possible. Voluntary disclosure consistently attracts lower penalties than cases where HMRC identifies the issue first.
At a Glance: Do You Need to Contact HMRC?
Use this summary to identify which category applies to your situation:
Legally Reducing Your Tax on Savings Interest
If your savings interest is approaching or exceeding your allowances, there are several entirely legitimate steps you can consider to reduce your tax liability.
Use Your ISA Allowance
Interest earned inside any type of ISA such as Cash ISA, Stocks and Shares ISA, or Innovative Finance ISA. This is completely exempt from income tax and does not count towards your PSA. For the 2024/25 and 2025/26 tax years, you can invest up to £20,000 per year across all ISA types combined. Moving savings into a Cash ISA is one of the simplest and most effective ways to shelter interest income from tax.
Consider Transferring Savings Between Spouses
If you are married or in a civil partnership and one of you pays a lower rate of income tax, transferring savings or the interest-bearing account itself to the lower-earning partner can make use of their larger PSA and, potentially, their Starting Rate for Savings. Each person’s tax position is assessed independently, so this is a perfectly legal and often underused approach.
The Marriage Allowance also allows a non-taxpayer to transfer up to 10% of their Personal Allowance (£1,260 in 2024/25) to their spouse or civil partner, which may further reduce the tax payable on savings income.
Consider Transferring Savings Between Spouses
Children have their own Personal Allowance and can receive a certain amount of interest tax-free. However, there is an important rule to be aware of: if a parent gifts money to a child and the resulting interest exceeds £100 in a tax year, the entire interest amount is treated as the parent’s income for tax purposes not the children.
This rule does not apply to money gifted by grandparents or other relatives, nor does it apply to Junior ISAs, where interest always grows tax-free regardless of the source of the funds.
Conclusion
Savings interest taxation has become meaningfully more relevant for ordinary UK savers in recent years. The key takeaway is that most savers have nothing to worry about. But if any of the exceptions in this guide apply to you acting before the tax year end is always the smarter move. A missed obligation rarely gets cheaper with time.
If you are unsure where you stand, speaking to a qualified tax adviser to get clarity.
