Tax on savings interest and investment income

Do I have to pay tax on savings and investments? 

This will depend on your other income and what types of investments you hold, but there are many ways to reduce the amount you pay in tax or eliminate it completely in the case of Isa products.

There are three main types of savings and investment income on which you may have to pay tax – interest from savings, income from dividends and income from life insurance investments.

You’ll only begin paying tax once your taxable income exceeds your personal allowance, the starting rate for savings, the personal savings allowance, or the dividend allowance.

How the personal allowance works

Most people are allowed to receive a certain amount of income before having to pay income tax. This is known as the basic personal allowance and in 2025-26 it is worth £12,570.

You can use your personal allowance to earn income from savings tax-free if you have not used it up on your wages, pension or other income.

• Find out more:  tax-free income and allowances

How the starting rate for savings works

The starting rate for savings is a tax break on interest worth up to £5,000, aimed at those on a lower income. 

If you have used up your personal allowance, then it can help reduce the tax bill on your savings.

Every £1 of other income (for example your wages or pension) above your personal allowance reduces your starting rate for savings by £1. This effectively means that you can earn up to £17,570 in 2025-26 before having to pay any tax on savings interest.

How the personal savings allowance works

The personal savings allowance allows you to earn up to £1,000 of interest tax-free on top of the starting rate for savers.

The allowance varies depending on your income tax bracket;

• Basic-rate taxpayers – £1,000
• Higher-rate taxpayers – £500
• Additional-rate taxpayers – £0

Additional-rate taxpayers don’t receive a personal savings allowance, so if you earn more than £125,140 each year, you’ll need to pay tax on all your savings interest.

Can interest from savings push me into a higher tax bracket?

Be aware that savings income within the allowance still counts towards your income as a whole, and could push you into a higher tax bracket if you’re already near the threshold. If this happens, it may affect the level of personal savings allowance you’re entitled to, and the rate of tax due on any savings income that exceeds it.

So, if you are a basic-rate taxpayer and you earn enough interest from savings to be pushed into the higher-rate tax threshold, you’ll then only be entitled to a £500 personal savings allowance, and will pay 40% tax on the remainder that’s in the higher tax bracket.

In 2025-26, the higher-rate tax threshold in most of the UK kicks in at £50,270, the same as in 2024-25. While the higher-rate threshold works slightly differently in Scotland, the personal savings allowance works in the same way as the rest of the UK.

• Find out more: UK income tax rates 2025-26

What interest is covered?

The personal savings allowance and starting rate for savings covers interest from:

• bank and building society accounts
• savings and credit union accounts
• unit trusts, investment trusts and open-ended investment companies
• peer-to-peer lending
• trust funds
• payment protection insurance (PPI)
• government or company bonds
• life annuity payments
• some life insurance contracts

How much tax will I pay on savings interest?

It helps to think of these allowances sitting on top of each other; first the personal allowance (£12,570), then the £5,000 starting savings rate, and finally the personal savings allowance worth up to £1,000.

You pay tax on any interest over your allowances at your usual rate of income tax (20%, 40% or 45%). Scottish income tax rates do not apply to savings and dividend income. 

When HMRC calculates the tax you owe, it’ll first look at your income from other sources, and then from your savings income.

EXAMPLE

So, if you earn £14,000 a year from a part-time job and £5,000 in interest from savings, this is how you would be taxed in 2025-26:

• 0% on the first £12,570 income from your job = £0
• 20% income tax on the remaining £1,430 from your wages (£14,000 less the £12,570 personal tax allowance) = £286
• 0% tax on £3,570 of your savings (because you’ve lost £1,430 of the 0% savings band from your earnings over the personal allowance) = £0
• 0% tax on £1,000 of your savings using your £1,000 personal savings allowance = £0
• 20% tax on the remaining £430 savings interest = £86

Total tax bill = £372

Tax on investment income

If you own shares, you may get income in the form of dividends.

Dividends can be a great way to generate a regular income from your investments. But, as with any income you earn, you may have to pay tax.

Tax on dividends is lower than the rate you’ll pay on income from work or a pension, and the rate depends on your tax band:

• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%

How the dividend allowance works

You do not pay tax on any dividend income that falls within your personal allowance (£12,570). 

You also won’t need to pay any tax on the first £500 of dividend income you receive in 2025-26, regardless of your tax bracket. This is called the tax-free dividend allowance.

• Find out more: dividend tax explained

Tax-free savings and investments

There are several products that allow you to grow your money without having to worry about tax at all, even if you exceed the allowances described above.

Isas

The money you save in an Isa is completely free of income tax, no matter how much interest you earn, but there are limits on how much you can save.

In the 2025-26 tax year, every adult has an Isa allowance of £20,000, which is the maximum you are allowed to pay into an Isa between 6 April 2025 and 5 April 2026.

Savers can deposit the full £20,000 into a cash, stocks and shares or innovative finance Isa, or any mix of the three types. 

If you’re saving up to buy property for those aged 18-40, there is the lifetime Isa, which can be opened as a cash or investment Isa. This Isa has a lower annual limit – but, whatever you pay in will be taken from your £20,000 allowance.

If you’re saving on behalf of a child under 18, you can deposit up to £9,000 in Junior Isa tax-free in 2025-26. You can go for a Junior cash Isa (where the deposit and interest are guaranteed) or Junior stocks and shares Isa (where the money invested is at risk but could generate higher returns).

• Find out more: best cash Isa rates 2025

Are Isas still worth opening?

Even though there are now generous tax breaks on savings in the form of the personal savings allowance, and interest on non-Isa savings accounts tends to be higher, there are still significant long-term benefits to Isas, particularly if you’re a high earner or you have substantial savings.

It’s also worth bearing in mind that the personal savings allowance will protect your interest from tax this year – but if you’re growing savings over the long term once they’re in your Isa they’ll be tax-free forever.

• Find out more: are Isas still worthwhile?

NS&I premium bonds

National Savings & Investments (NS&I) offers several tax-free products, including a cash Isa and a Junior Isa.

But winnings on NS&I premium bonds are also tax-free. You can invest up to £50,000 in premium bonds and you can choose to take your winnings each month or re-invest them to buy more bonds (if you haven’t reached the limit).

• Find out more: what is National Savings & Investments?

Pensions

When you save into a pension you may be eligible for tax relief.

When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government.

Tax relief is paid on your pension contributions at the highest rate of income tax you pay.

• Find out more: tax relief on pension contributions explained

Child trust funds (CTFs)

Child trust funds or CTFs were savings and investment schemes for children born between 1 September 2002 and 2 January 2011 that received a boost from the government. 

It isn’t possible to open a CTF anymore and since 2010 the government top-ups have ceased, but if your children have them you can keep saving into them, or convert them into a Junior Isa.

Like Junior Isas, you can pay in up to £9,000 in the 2025-26 tax year, gains are tax-free and they can be rolled over into an Isa when they mature on your child’s 18th birthday.

How to pay tax on savings and investments

If you usually pay tax through the self-assessment system you can report your savings and investment income as part of your self-assessment tax return.

If you’re employed or receiving a pension HMRC will normally change your tax code to obtain the tax owed from your income. This happens automatically for savings interest, but you will need to let HMRC know if you earn between £500 and £10,000 in dividend income. However, if you earn over £10,000 from savings and investments you will need to complete a self-assessment tax return.

If you’re not employed, do not get a pension or do not complete a self-assessment tax return, your bank or building society will tell HMRC how much interest you received at the end of the year. HMRC will tell you if you need to pay tax and how to pay it.

• Find out more: how to fill in a self-assessment tax return

How to claim back overpaid tax

You might be able to reclaim tax paid on your savings interest or investment income in certain situations.

If you do not complete a self-assessment tax return you can fill in form R40 to claim the tax you were wrongly charged. 

If you complete a self-assessment tax return, you will need to make a change to your return to claim a refund. You can correct a tax return within 12 months of the self-assessment deadline, online or by sending another paper return. If you miss the deadline or if you need to make a change to a return from an earlier tax year you’ll need to write to HMRC. 

You can claim tax back on savings and investments from up to four tax years ago. It’ll normally take around six weeks to get your money back.