How tax on savings and investments works

You won’t be taxed on the cash you have, but you might pay tax on savings interest you get. Here’s a summary of how it works:

• savings interest is usually paid gross, meaning tax isn’t already taken off
• most people are allowed to earn a certain amount of tax-free interest every tax year (6 April to 5 April)
• interest is counted in the tax year you can access it, which might not be the year you earned it 
• interest in a joint account is usually split equally for tax purposes
• if you earn more than your allowance, HMRC will usually change your tax code so you’ll pay tax automatically – you’d need to declare savings interest if you use a self-assessment tax return
• if tax is payable on savings interest, it’s charged at your usual rate of income tax (0%, 20%, 40% or 45%).

Interest from the following places would usually be taxable:

• bank, building society and credit union accounts
• open-ended investment companies (OEICs), investment trusts and unit trusts
• peer-to-peer lending
• government or company bonds
• life annuity payments and some life insurance contracts.

Your tax-free allowance is based on your total annual income, including any money you earn from employment, pensions, certain benefits, savings and investments and any reliefs or exemptions. 

To calculate your allowance:

1. Take your Personal Allowance, which is usually either: 
   1. £12,570 
   2. £13,830 if claiming Marriage Allowance
   3. £15,440 if claiming the Blind Person’s AllowanceOpens 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.

Here are two examples, based on the standard £12,570 Personal Allowance:

• Someone with a £6,500 salary can earn £12,070 in tax-free interest (£18,570 minus £6,500).
• Someone with a £14,500 salary can earn £4,070 in tax-free interest (£18,570 minus £14,500).

After that, you’d pay tax at the usual basic rate, currently 20%.

Each tax year, you get these tax-free allowances:

• Your Personal Allowance for all income.
• Up to £5,000 from your starting rate for savings, so you can earn interest without paying tax. If you earn more than your Personal Allowance in non-savings income, this is reduced by £1 for every £1 earned. 
• £1,000 for savings interest from the Personal Savings Allowance (PSA).

If you earn between £17,571 and £125,140, you get a fixed tax-free allowance for savings interest:

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

Most investment income will be taxed at your usual income tax rate, so will count towards your Personal Allowance. But there’s a separate tax-free allowance if you own shares.

For the 2025/26 tax year, you can earn up to £500 in dividends – a portion of the company’s profits that’s paid to shareholders periodically during the year – without paying tax on it.

You’ll pay dividend tax over this amount, based on your income tax band:

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

How you’re taxed on savings and investments depends on how you usually pay tax:

• If you’re employed or receiving a pension:
  • HMRC will usually change your tax code to take extra tax from your income. This is usually automatic for savings interest, but you’ll need to tell HMRC if you earn between £1,000 and £10,000 in dividend income. 
  • If you earn more than £10,000 from savings and investments, you’ll need to complete a Self Assessment tax return.
• If you self-assess, you can report any savings or investment income as part of your usual tax return. 
• If neither of the above apply, HMRC will contact you if you owe tax on savings interest. You’ll need to tell them about dividend interest.

To claim back overpaid savings tax, you should either:

• complete form R40Opens in a new window online or print one out and return by post
  
• apply for a refund on your Self Assessment tax return

You’re able to claim for the current and previous four tax years. 

Some savings products pay interest that’s tax-free, regardless of how much you earn or other savings interest you are receiving. 

These include: 

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

Any interest or dividend income earned won’t impact your tax-free allowances, such as the PSA or dividend allowance. Though there are limits to how much you can save each tax year, with the current ISA limit at £20,000. 

Find out more in:

• ISAs and other tax-efficient ways to save or invest
• Stocks and shares ISAs
• Why should I save into a pension?
  

With any type of investment, there’s a risk you could lose your money. Consider getting regulated financial advice to help you choose which type is right for you. See Choosing a financial adviser for help.