What are HMRC's tax rules on savings?

Your savings account might not be just for a rainy day, but instead to put money away to pay for special occasions such as holidays, or a specific goal like buying a car. It essentially helps separate "the money we need right now and the funds we need later on", said Unbiased, plus you can earn interest and see your funds grow.

The average easy-access savings interest rate is now 2.92%, according to Moneyfacts, but some accounts pay up to 5%.

While the savings market has been "sweetened" over the past year by higher interest rates, said The Times Money Mentor, after more than a decade of "rock-bottom" deals, those with "bigger cash piles" could soon face tax implications.

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This is because the interest rates on offer could take savers above the personal savings allowance (PSA).

Tens of thousands of savers could be "caught out" and face fines from HMRC, said the Financial Times, if they don't pay any tax owed.

Savings tax rules

Interest on savings accounts is paid by banks and building societies in recognition of the fact that they "hold (and have use of) your money", said the Low Incomes Tax Reforms Group.

But there may be income tax to pay at your marginal rate to HMRC for the interest earned, depending on your other income and what types of investments you hold.

Most savers can earn "some interest" without paying tax, said Willis Owen, and there are allowances that may reduce "or even eliminate" any tax due.

Personal allowance

The basic personal allowance that all adults can earn before paying tax is currently £12,570 for the 2025/26 tax year.

This can also be used for savings interest, said Which? "if you have not used it up on your wages, pension or other income".

What is the personal savings allowance?

The personal savings allowance (PSA) was launched by then-chancellor George Osborne in April 2016.

It gives basic rate taxpayers a £1,000 allowance that can be earned from cash savings accounts tax-free, dropping to £500 for higher rate taxpayers.

HMRC declared at the time of the PSA introduction that around 85% of savers would no longer pay tax on their savings, said This Is Money, but the PSA "hasn't budged" since and has failed to move in line with the cost of living.

This could put savers in a position they "might not have anticipated in recent years" – paying tax on savings interest.

Starting rate for savings

There is a different savings allowance for lower earners with total income below £17,570, known as the starting rate for savings.

Savers can earn up to £5,000 in savings interest completely tax-free in addition to personal income tax allowance and personal savings allowance.

How to pay savings tax to HMRC

Banks tell HMRC how much interest they have paid you, said The Times Money Mentor, "so the taxman will know how much you have to pay".

The way you pay tax on your savings interest, said Money.co.uk, depends "on how you work". The self-employed have to declare interest earned on savings through their self-assessment tax return.

Things are "slightly different" if you are employed and taxed under PAYE. HMRC will change your tax code "so you pay the tax automatically".

How to avoid paying tax on savings

It may be worth considering a cash ISA, said Rest Less, as you can save up to £20,000 each year and "won't have to pay any tax on your returns". Cash ISA rates have been "pretty poor" in the past, but they are catching up with standard savings accounts, although it is important to note they won't beat inflation.

You could also put more money into your pension, said MoneyWeek. There is the "downside of not being able to access it until later in your life" but you also get tax relief on contributions.

Another option is Premium Bonds, said This Is Money, as "any money won from Premium Bonds prizes is tax-free".