Officials at HM Revenue and Customs have warned that savers could fall foul of tax rules on interest if they go beyond the £5,000 starting rate
A person uses an ATM cash machine at a branch of a Santander bank in Liverpool, north west England, on March 19, 2025. Santander announced on Wednesday that it will close 95 of it’s UK branches, also cutting staffing hours at a further 36 branches. (Photo by Paul ELLIS / AFP) (Photo by PAUL ELLIS/AFP via Getty Images) (Image: Getty)
Many individuals prefer to have a safety net tucked away in their savings account, but HM Revenue and Customs officials have cautioned that exceeding the £5,000 ‘starting rate’ on interest from savings could lead to breaches of tax rules. Under current financial regulations, individuals can earn this amount in interest before they are liable for tax.
However, this can vary depending on other income that utilises the personal tax allowance. HMRC stated that “Most people can earn some interest from their savings without paying tax.”
The allowances for earning interest before tax is due include using your Personal Allowance for tax-free interest if it hasn’t been used up on wages, pension or other income.
It explains that allowances for earning interest before you have to pay tax on it include:
your Personal Allowancestarting rate for savingsPersonal Savings Allowance
The standard Personal Allowance is £12,570, which is the amount of income you don’t have to pay tax on. The tax year runs from 6 April to 5 April the following year, and the allowance is smaller if your income exceeds £100,000.
Income Tax rates and bands
The table shows the tax rates payable in each band if you have a standard Personal Allowance of £12,570. Please note that income tax bands differ if you reside in Scotland. Chancellor Rachel Reeves in the November Budget froze the levels for another three years until 2031 meaning they will have remained the same for a decade.
Those with lower incomes receive an additional tax-free allowance of up to £5,000 for their savings.
If your income from pension or work is under the personal allowance (£12,570), you get the full £5,000, meaning you can earn up to five grand in savings interest without being taxed.If your income from pension or work is above the personal allowance (£12,570), you lose £1 of the £5,000 starting rate for savings for each £1 you earn above the personal allowance.If your income from pension or work is £17,570 or more. You don’t get any of the £5,000 starting rate for savings.
Your personal savings allowance is valued at up to £1,000. The personal savings allowance (PSA) allows anyone who pays the basic 20% tax rate (those earning more than the £12,570 personal tax allowance but less than the £50,270 per year higher rate tax threshold) to earn £1,000 per year in savings interest before any tax is due on it.
This is in addition to the £5,000 starting savings rate. Therefore, if you’re on a low income, you can earn up to £5,000 in savings interest without paying tax, and you’ll also pay no tax on the next £1,000 of savings interest – utilising your personal savings allowance.
Interest covered by your allowance
Your allowance applies to interest from:
bank and building society accountssavings and credit union accountsunit trusts, investment trusts and open-ended investment companiespeer-to-peer lendingtrust fundspayment protection insurance (PPI)government or company bondslife annuity paymentssome life insurance contracts
If your other income is £17,570 or more
You’re not eligible for the starting rate for savings if your other income is £17,570 or more.
If your other income is less than £17,570
Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
HMRC gives this example
You earn £16,000 of wages and get £200 interest on your savings.Your Personal Allowance is £12,570. It’s used up by the first £12,570 of your wages.The remaining £3,430 of your wages (£16,000 minus £12,570) reduces your starting rate for savings by £3,430.Your remaining starting rate for savings is £1,570 (£5,000 minus £3,430). This means you will not have to pay tax on your £200 savings interest.
FOr more information on the savings tax limits click on the Gov website here.
