Severn Accounting
Tax & Accounting

Taxation of savings income in 2025/26

By Ali Jaw ·

There are various ways to enjoy savings income without paying tax on it. In addition to the personal allowance, basic and higher rate taxpayers benefit from a personal savings allowance. Taxpayers whose taxable non-savings income exceeds certain thresholds may not be entitled to this allowance, but understanding the rules can help maximise your tax-efficient savings strategy for the 2025/26 tax year.

Understanding the Personal Savings Allowance

The personal savings allowance (PSA) is one of the most valuable – and often overlooked – tax reliefs available to UK savers. It allows you to earn interest on savings without tax as long as your total income remains within set limits.

For the 2025/26 tax year, the allowances are:

  • Basic rate taxpayers: £1,000 PSA
  • Higher rate taxpayers: £500 PSA
  • Additional rate taxpayers: £0 PSA

These thresholds apply to interest earned on savings accounts, bonds, and similar products. Importantly, the allowance is calculated on your taxable income, not your gross income. If your non-savings income (salary, pension, rental income, etc.) is below your personal allowance, you may still benefit from the full PSA.

How Non-Savings Income Affects Your Allowance

Where things become more complex is when your non-savings income starts to approach the basic rate band ceiling. Once your total taxable income exceeds £50,270 in 2025/26, you move into higher rate tax, and your PSA drops from £1,000 to £500.

For additional rate taxpayers – those with taxable income above £125,140 – there is no PSA whatsoever. All savings interest is taxed at 45%.

A practical example: if you’re a basic rate taxpayer earning £35,000 from employment and receive £2,000 in savings interest, the first £1,000 is tax-free under the PSA, and you’ll pay basic rate tax (20%) on the remaining £1,000, amounting to £200 tax due.

Planning Your Savings Strategy

Understanding these allowances is crucial for tax-efficient financial planning. If you’re approaching the higher rate threshold, it may be worth reviewing how your income is structured or how savings are held.

Tax-free savings options can be particularly valuable. Individual Savings Accounts (ISAs) remain one of the most popular vehicles, allowing £20,000 per tax year across cash, stocks and shares, or lifetime ISAs (with restrictions). Any interest earned within an ISA wrapper is completely tax-free, regardless of your income level.

For those over 40, Lifetime ISAs offer a 25% government bonus on deposits up to £4,000 annually – provided the funds are earmarked for a first home purchase or retirement after age 60.

Fixed-rate bonds and NS&I products are also worth considering. Whilst NS&I Premium Bonds don’t pay interest (eliminating tax concerns), NS&I Direct Savings Accounts and Fixed Rate Bonds do, and the interest falls within your PSA if you’re a basic rate taxpayer.

Reporting Savings Income to HMRC

Even if your savings income falls entirely within your allowance and you don’t owe tax, you must still declare it if you’re completing a Self Assessment tax return. Banks and building societies report interest paid directly to HMRC through the Interest in Respect of Savings Accounts (IRSA) return, so it’s important to be transparent.

If you’re not normally a Self Assessment taxpayer but you’ve earned savings income that exceeds your PSA, you may need to register and file a return. HMRC can also recover underpaid tax through your PAYE code if appropriate.

Planning Ahead for 2025/26

The coming tax year is a good time to review your savings arrangements. If you’re a higher rate taxpayer, maximising ISA contributions should be a priority. If you’re a basic rate taxpayer with surplus income, ensure you’re using your £1,000 PSA fully before considering taxable savings accounts.

Consider too whether your income structure might change – a promotion, bonus, or pension withdrawal could push you into a different tax band and affect your PSA entitlement.

The rules around savings income and allowances are straightforward once you understand them, but everyone’s circumstances are unique. Getting them right can mean the difference between paying unnecessary tax and maximising your after-tax returns on hard-earned savings.

For tailored advice, contact Severn Accounting — we’re here to help.