With interest rates still relatively high, many savers are seeing their bank balances grow—but that also means more people are paying tax on their savings income than they might expect.
The good news? There are several allowances and exemptions that could help you earn interest tax-free—if you know how to use them.
Here’s a simple breakdown of how savings income is taxed in 2025/26, and how much you could earn without paying a penny to HMRC.
- Start With Your Personal Allowance
Everyone in the UK gets a personal allowance, which is the amount of income you can receive each year tax-free. For 2025/26, that figure is £12,570.
If you haven’t used your full personal allowance on salary or other income, the remainder can be applied to your savings income—meaning you don’t pay tax on that portion either.
- Add Your Savings Allowance
On top of your personal allowance, most taxpayers also benefit from a personal savings allowance, which lets you earn a set amount of interest tax-free:
- £1,000 for basic rate taxpayers
- £500 for higher rate taxpayers
- £0 for additional rate taxpayers (those earning over £125,140)
So, if you’re a basic rate taxpayer, you could potentially earn £1,000 in interest without paying any tax—even after using up your personal allowance.
Watch out: With higher interest rates, you might now exceed your savings allowance without realising. If that happens, you’ll need to report the interest to HMRC—possibly even register for Self Assessment.
- Don’t Overlook the Starting Rate for Savings
There’s another lesser-known allowance that could be useful—the starting rate for savings.
This gives an extra £5,000 tax-free band specifically for savings income, but only if your other taxable income is below £17,570 (your personal allowance of £12,570 plus the £5,000 band).
If your income from wages, pensions, or rental income is low, you might qualify for this too—giving you even more tax-free savings potential.
- Use ISAs for Truly Tax-Free Interest
For many people, the simplest way to avoid tax on savings is to use an ISA.
In 2025/26, you can invest up to £20,000 in an Individual Savings Account (ISA), and any interest earned is completely tax-free—no matter how much you earn.
This is especially valuable for higher earners, who lose access to the personal savings allowance and personal allowance once their income passes certain thresholds.
How Much Interest Can You Earn Tax-Free in 2025/26?
If you qualify for all the main allowances and use them strategically, here’s how much tax-free interest you could potentially earn:
- £12,570 – Personal allowance (if not used for other income)
- £5,000 – Starting rate for savings (if income under £17,570)
- £1,000 – Personal savings allowance (basic rate taxpayers)
- £20,000+ – ISA savings (any interest is tax-free)
That’s up to £18,570 tax-free interest, plus whatever you earn from your ISA.
Want to Maximise Your Tax-Free Savings?
Whether you’re unsure which allowances you qualify for, or you’ve recently started receiving more interest from your bank or savings accounts, we’re here to help.
Get in touch with Jon or the team today to make sure you’re not paying tax unnecessarily on your savings—and to build a tax-efficient savings plan for the year ahead.
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