Understanding Interest Income and Tax in the UK (2025) – What You Need to Know
- customerservice354
- Aug 12
- 3 min read
In 2025, with interest rates still fluctuating and savings trends on the rise, many individuals in the UK are seeing noticeable gains from their savings and investments. But with extra interest comes a critical question: do I have to pay tax on this?
If you're unsure how interest income is taxed in the UK, you're not alone – and getting it wrong could mean overpaying (or worse, under-declaring) your tax. In this blog, we’ll break down what counts as interest income, how much you can earn tax-free, and the smartest ways to minimise what you owe.
What is Interest Income?
Interest income is the money you earn from certain savings or investment products – essentially, money earned for letting a financial institution or entity use your money.
Common examples include:
Interest from bank or building society savings accounts
Interest from UK government or corporate bonds
Interest from peer-to-peer lending platforms
Interest distributions from specific investment funds
Whether you're saving for a rainy day or growing a long-term pot, it’s important to know what income HMRC expects you to report.
The Personal Savings Allowance (PSA)
The Personal Savings Allowance is a tax-free allowance for interest income – and it varies based on your tax band:
Example:
If you're a basic rate taxpayer and you earn £900 in interest in a tax year, it's completely tax-free. But earn £1,200, and you'll pay tax on the £200 that exceeds your PSA.
ImportantL The PSA applies to all non-ISA interest - including from savings accounts, bonds, and P2P platforms.
What if Your Income is Lower?
If your other income (such as wages or pensions) is less than £17,570, you may also benefit from the starting rate for savings — an extra tax-free allowance of up to £5,000 on top of your PSA.
Here's how it works:
The starting rate is £5,000 max
But it’s reduced by £1 for every £1 of income you earn above your Personal Allowance (£12,570 in 2025/26)
Example: You earn £16,000 from wages and £200 in savings interest:
Your Personal Allowance (£12,570) covers the first part of your wages
The remaining £3,430 of your wages reduces your starting savings rate by the same amount
You still get a £1,570 starting rate for savings – more than enough to cover your £200 interest.
So you pay no tax on your savings interest
This rule can be especially valuable for part-time workers, pensioners, or people with fluctuating incomes.
(We know, it sounds complicated! That's what we're here for. Get in touch so that we can advise you best).
ISAs – Your Tax-Free Secret Weapon
If you want to earn interest without worrying about tax at all, Individual Savings Accounts (ISAs)Â are your best friend.
Any interest earned within a Cash ISA, Stocks & Shares ISA, or Innovative Finance ISAÂ is completely tax-free
This tax benefit applies regardless of how much interest you earn or what tax band you’re in
That means even additional rate taxpayers, who get no PSA, can still benefit from tax-free interest via ISAs.
Do You Need to Report Interest Income?
In most cases, banks and financial providers report your interest to HMRC automatically. If all your interest is within the PSA, you usually don’t need to take action.
However, you must report your interest income if:
Your total interest exceeds your PSA
You earn untaxed interest from non-UK accounts or P2P lending
You are an additional rate taxpayer (and have no PSA)
HMRC asks you to complete a Self Assessment
If you're unsure, it's always better to check — penalties can apply for under-reporting income.
How We Can Help
At Practical Business Solutions, we work with individuals and small business owners to help them understand and manage their finances — including untangling the tax on savings and investments.
Whether you’re:
Confused about what needs reporting
Wondering if you're using your allowances efficiently
Wanting to reduce your tax bill legally
We’re here to give straight-talking, honest advice — no jargon, just clear answers.
Ready to Take Control of Your Tax?
If you’ve earned interest this year or want to make sure you’re not paying more than you need to, get in touch with us today.
Let’s make sure your money’s working for you — not against you.