Every individual living in the United Kingdom is liable to pay tax according to their income and investment level. If you are residing in the UK and need guidance about how much interest is tax-free, then this article will give you all the details.

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How Much Interest is Tax-Free in the UK?

Interest is the money charged when someone borrows money or the amount earned when someone lends money. Interest is generally the percentage of the amount lent or borrowed. The interest is paid on agreed time intervals by both parties. The interest earned is also taxed in the United Kingdom however, the tax percentage depends on the amount of interest.

The Personal Savings Allowance

The personal savings allowance (PSA) is the amount of savings that is tax-free, and the interest earned on the personal savings allowance is tax-free. The allowance an individual receives depends on the income tax they pay. There are three types of taxpayers

• Basic rate taxpayers (20%)

The basic rate taxpayers are allowed tax-free savings of £1000 each year.

• Higher rate taxpayers (40%)

The higher rate taxpayers can earn up to £500 in savings without any tax on interest.

• Additional rate taxpayers (45%)

The additional rate taxpayers do not get any allowance, and they need to pay tax on any amount of interest they get.

If an individual is a non-taxpayer having an income of less than £12,570 per year, he is allowed to earn as much as £18,570 in savings interest as the tax-free amount. However, it depends on the income mode whether it is from a pension or from working as an employee in a company or self-employed.

What Types of Savings Interest are Taxed?

In the United Kingdom following types of interests are taxed.

• Interest earned from banks, societyand credit union accounts
• open-ended investment companies (OEICs), investment trusts and unit trusts
• interest earned from money lent to peers, known as peer-to-peer lending
• interest earned from government or company bonds
• life annuity payments and some life insurance contracts

Interest on Joint Accounts

If you are a joint account holder, the interest will be divided equally between the account holders. You should contact the HMRC if you observe any inequality in division.

If you go over your allowance

If the interest earned from a joint account goes over the allowance limit, then you are liable to pay tax based on your annual income.

If you’re self-employed

If you are self-employed, then you need to complete the self-assessment before filing a tax return and report interest earned on savings s the self-assessment form.

If you earn over £10,000 from your investments and savings, then you need to re-register for self-assessment. You can check if you are eligible for the self-assessment form on the HMRC website.

If you’re employed or get a pension

If you are employed in a firm or get a state pension, the HMRC will assign you a tax code, so your tax is automatically paid. To assign you a tax code, the HMRC will estimate the amount of tax you will earn in the current year from the amount of interest earned last year. HMRC will change your tax code so that you pay the tax automatically. To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year. The HMRC will send a tax calculation letter to your address informing you if you have overpaid or underpaid the tax. If the HMRC letter is not received by 31st March of the current year, you should contact HMRC as soon as possible before the deadline to avoid any fine.

Tax on Investments

Tax on investments will be charged based on your annual income tax, also counting in your personal allowance rate. For the tax year 2025-2026, individuals can earn up to £500 in dividends without paying any tax. Individuals will pay tax on dividends based on the following rates

• 8.75% for basic rate taxpayers
• 33.75% for higher-rate taxpayers
• 39.35% for additional rate taxpayers.

Tax-free Savings and Investments

There are some saings and investments that are completely tax-free in the UK. No tax is charged on such capital assets, regardless of how much you are earning from them. These savings and investments include:

• Cash ISAs for savings
• stocks and shares ISAs for investments
• saving into a pension.

The interest or dividend earned from above mentioned savings and investments won’t affect your allowance limits. However, there are limits to how much you can earn tax-free from such investments and savings, where the current limit for an ISA is £20,000.

How Much Do You Pay Depends on Your Earnings?

The tax-free personal allowance depends on the annual income of an individual, including income from employment, state pension, old-age benefits, savings and investments, relief funds and exemptions.

If You Earn Upto £12,570

To calculate your allowance:

1. Take your Allowance, which is usually either:
   1. £12,570
   2. £13,830 if claiming Marriage Allowance
   3. £15,440 if claiming the Blind Person’s Allowance opens in a new window
2. Add £6,000—this is the maximum starting rate band for savings and the Personal Savings Allowance (PSA).
3. Minus any non-savings income, such as your wages or pension.

How it Works

Each tax year, every individual gets tax allowances under criteria set by the HMRC. These allowances are

• Your Allowance for all income.
• Up to £5,000 from your starting rate for savings, so you can earn interest without paying tax.
• £1,000 for savings interest from the Personal Savings Allowance (PSA).

If you earn £12,571 to £125,140

If you earn between £12,571 and £125,140, you get a fixed tax-free allowance for savings interest:

If you earn over £125,140

There’s no tax-free allowance for savings interest, you’ll pay tax on everything earned.

Conclusion

Interest is usually taxed in the UK based on the annual income tax rate of the individual. There are certain savings and investments which are allow tax-free interest by the UK government. These include pension, relief funds and exemptions, old age benefits, etc. There are different tax rates on different amounts of interest earned. The interest earned in a joint account will be divided equally between the account holders. An account holder can contact the HMRC if the interest is not equally divided.

Reach out to our intelligent and clever-minded guys to get the answer to your queries in the UK, we will get to your answers quickly. We will help to decide how to deal with your tax implications.

Disclaimer: The information about how much interest is tax-free provided in this blog includes text and graphics of a general nature. It does not intend to disregard any of the professional advice.