The amount of tax-free interest one can earn depends on the Personal Savings Allowance and the Starting Rate for Savings, along with the individual's total income and tax band.
Personal Allowance and Personal Savings Allowance
- The Personal Allowance for the 2025/26 tax year is £12,570. This is the amount of income, including interest, you can earn tax-free.
- On top of that, the Personal Savings Allowance lets basic rate taxpayers earn up to £1,000 of interest tax-free, higher-rate taxpayers get up to £500, and additional rate taxpayers get no allowance.
Starting Rate for Savings
- If non-savings income (like wages or pensions) is less than £17,570, savers may qualify for a starting rate for savings, where up to £5,000 of interest can be tax-free.
- This allowance reduces by £1 for every £1 of other income above the Personal Allowance.
Examples
- A basic-rate taxpayer can have approximately £19,600 in a top paying savings account before hitting the tax-free limit on interest.
- Higher-rate taxpayers hit their tax-free limit at around £9,800 in savings at the same rate.
Summary of Allowances for 2025/26:
Income Tax Band| Personal Savings Allowance (tax-free interest)| Starting Rate
for Savings (if eligible)
---|---|---
Basic rate| £1,000| Up to £5,000 (reduced by other income)
Higher rate| £500| Not eligible if income ≥ £17,570
Additional rate| £0| None
This means up to around £6,000 of interest could be tax-free for certain low- income basic-rate taxpayers when combining both allowances.
