A basic-rate taxpayer who leaves £20,000 in an account paying 5.00% AER for a full year earns £1,000 of interest, which is exactly the size of the Personal Savings Allowance. Every pound above that is taxed. At 4.00% the same allowance stretched to £25,000 of savings, and at the 5.35% that the best five-year fixed bond pays today, the tripwire sits at roughly £18,700. Savings rates have been rising for weeks, and a balance many households would call modest now earns more interest than HMRC lets them keep tax-free.
Two dates make this worth checking now. The Chancellor, John Healey, has confirmed his first Budget for Wednesday 28 October, and a two-percentage-point rise in the tax rates on savings interest is already written into law for the 2027-28 tax year. The figures below come from GOV.UK, the Bank of England, NS&I and the Moneyfactscompare roundups of 1 and 6 October 2026. Savings rates move daily, so treat every rate as a snapshot.
The three allowances and how they stack
GOV.UK lists three separate ways your interest can escape tax each year (6 April to 5 April), and most people get more than one. They stack on top of each other rather than replacing one another.
- Personal Allowance: £12,570 of total income is tax-free, and if wages or pension do not use all of it, HMRC applies the unused part to your interest.
- Starting rate for savings: up to £5,000 of interest at 0%, but only if your other taxable income (not counting savings or dividends) is below £17,570. Every £1 of other income above the Personal Allowance reduces it by £1.
- Personal Savings Allowance: £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers and nothing for additional-rate taxpayers. It sits on top of the starting rate, so a low earner can have both.
Your band is decided after your interest is added to your other income, which catches people out. Someone on £49,000 of salary is a basic-rate taxpayer on paper, but £2,000 of interest takes total income past the £50,270 higher-rate threshold, and the allowance drops from £1,000 to £500 for that year. These bands apply in England, Wales and Northern Ireland; Scottish income tax bands differ.
Where the tripwire sits at today's rates
A higher-rate taxpayer hits the wall at half the balance.
| Savings rate (AER) | Basic-rate taxpayer (£1,000 allowance) | Higher-rate taxpayer (£500 allowance) |
|---|---|---|
| 4.00% | £25,000 | £12,500 |
| 4.55% | about £22,000 | about £11,000 |
| 5.00% | £20,000 | £10,000 |
| 5.35% | about £18,700 | about £9,350 |
The table shows the balance at which one full year of interest equals the allowance, which is the allowance divided by the rate, and it ignores compounding and rate changes. Real accounts are messier than that. Moneyfactscompare's 1 October roundup shows two easy-access accounts at 5.00% AER, Starling's Easy Saver and LemFi's instant-access account, and both rates include six-month bonuses; Starling's is open only to new current account customers in their first 30 days. Once a bonus ends the rate drops, so a balance that overshoots the allowance in year one may sit under it in year two. The same roundup put the best one-year fixed rate at 5.12% AER, the best two-year at 5.15%, the best three-year at 5.18% and the DF Capital five-year at 5.35%. At £15,000 in the bank, a basic-rate taxpayer earning 5.00% has £750 of interest and owes nothing. The trouble starts when a bonus, an inheritance or a house sale lands on top of an emergency fund that was already earning interest in three different accounts, because HMRC adds up every account you hold.
What 22%, 42% and 47% will cost from April 2027
Finance Act 2026, section 5, sets the savings rates of income tax for 2027-28 at 22% (basic), 42% (higher) and 47% (additional), up from 20%, 40% and 45%. HM Treasury's own explainer says the way savings income is reported and paid stays the same, and that only the rates change. The allowances of £1,000 and £500 are not touched by that measure.
The rise is smaller in cash terms than the headlines suggest. On £30,000 earning 5.00%, interest is £1,500. A basic-rate taxpayer has £500 above the allowance, so the tax goes from £100 to £110. A higher-rate taxpayer has £1,000 above the allowance, and the bill moves from £400 to £420. An additional-rate taxpayer, with no allowance at all, goes from £675 to £705. Crossing from basic to higher rate does far more damage than the two-point rise: on that same £1,500 of interest, the bill jumps from £100 to £400 under today's rules.
The Budget has not changed any of this so far. Moneyfactscompare's Budget guide lists the savings tax rise among measures from last year's Budget that are "still scheduled", and its finance expert Rachel Springall says people should be wary of "drastic decisions until more is known for certain". That is sound advice about rumours, but it is no reason to leave a taxable balance sitting above your allowance, because the existing rules already cost you money. On rates themselves, the Bank of England held Bank Rate at 3.75% on 17 September by six votes to three, with the minority wanting 4%, and its next decision is due on 5 November.
Fiscal drag does the damage quietly
Income tax thresholds are frozen, and Moneyfactscompare reports that last year's Budget extended the freeze to 2030/31. By the Office for Budget Responsibility's estimate, quoted in the same guide, 4.8 million more people will become higher-rate taxpayers and 600,000 more additional-rate taxpayers as a result. Anyone tipped over £50,270 in that way loses half of the Personal Savings Allowance, even though their savings never moved. HM Treasury's explainer says over 90% of taxpayers do not pay savings tax, and its footnote cites HMRC figures of 4% of taxpayers in 2022/23 and 9% in 2029/30, so the group who do is growing. If your salary sits within a few thousand pounds of £50,270, work out your band including interest before the pay rise arrives rather than after the letter from HMRC.
How the tax actually gets collected
If you are not in Self Assessment and your interest is £10,000 or less, the process is mostly out of your hands. After 5 April, your bank or building society tells HMRC how much interest it paid you, and HMRC adds up every account, including credit union savings. If you owe tax, GOV.UK says HMRC sends a calculation, usually between June and the following March, and normally collects the money through your tax code. Where there is no tax code to adjust, you may get a Simple Assessment letter instead. If you complete Self Assessment, the interest goes on your return, and anyone with more than £10,000 of interest in a year must report it there. HMRC also puts an estimate of your interest into your tax code, based on what you earned in the previous tax year. If you moved money into a 5% account this summer, that estimate is probably too low, which means a bigger bill later. Open your Personal Tax Account, work out your real figure by multiplying your average monthly interest by 12 (GOV.UK's own method), and ask HMRC to update the code if it is wrong. For joint accounts, HMRC splits the interest equally between the holders by default, and you can contact it if the split should be different.
Fixed bonds can bunch the tax into one year
NS&I's new Guaranteed Growth Bonds, with fresh issues on sale from 6 October, pay 4.99% gross for one year, 5.07% for two, 5.10% for three and 5.17% for five. NS&I says the interest is added without tax deducted and is taxable in the tax year the bond matures. On £20,000 in the five-year bond at 5.17% AER, interest compounds to roughly £5,730 by maturity, and all of it lands in a single tax year. Using today's allowance and today's 20% rate, a basic-rate taxpayer would have about £4,730 above the £1,000 allowance and a bill near £950. Laddering the money across bonds that mature in different tax years, or putting part of it in an ISA, keeps each year's interest lower.
Check the maturity wording on any fixed bond before you buy, because the date interest is credited decides which tax year it counts in. Premium Bond prizes, by contrast, are tax-free according to NS&I.
The ISA question, with the arithmetic
Interest inside an ISA is entirely tax-free, and it does not use up the Personal Savings Allowance. The ISA allowance is £20,000 for 2026-27, and that tax year ends on 5 April 2027. From 2027-28, Moneyfactscompare says, under-65s will be limited to £12,000 a year in cash ISAs, so for them this is the last tax year in which a full £20,000 can go into cash.
Past your allowance, a slightly lower ISA rate beats a higher taxable rate, and the sums are not close. Moneyfactscompare's 6 October article puts the best five-year fixed cash ISA at 5.25% from Shawbrook, against 5.35% for the best taxable five-year bond from DF Capital. On each pound of interest above the allowance, that taxable bond is worth about 4.28% to a basic-rate taxpayer paying 20% and about 3.21% to a higher-rate taxpayer paying 40%. Use the ISA for the overflow and keep the taxable account for the amount that fits under your allowance. The counter-argument is liquidity: a fixed ISA usually locks the money away for the full term. If you may need the cash, compare an easy-access ISA's rate with what a taxable account leaves you after tax, bearing in mind that a 5.00% taxable rate is worth only 3.00% to a higher-rate taxpayer on the interest above the allowance.
Five checks to make this month
- Add up the last twelve months of interest from every bank, building society, credit union and NS&I account you hold, including the ones you forgot about.
- Add that total to your other income and see which band you land in, which tells you whether your allowance is £1,000, £500 or nothing.
- If interest will exceed the allowance, move the overflow into a cash ISA before 5 April 2027, or into Premium Bonds if you want tax-free prizes rather than a fixed return.
- Open your Personal Tax Account and compare HMRC's interest estimate with your actual income from savings.
- If you live with a partner, look at which of you holds which accounts, and tell HMRC if a joint account should not be split 50/50.
When HMRC's calculation does arrive, check it against your bank statements, because GOV.UK says to contact HMRC if any amount looks wrong. And if you owe tax on savings interest and no letter arrives by 31 March of the following tax year, the duty to make contact is yours, so put that date in your diary now.