How UK savings interest is taxed in 2026/27
Most people in the UK do not pay tax on their savings interest thanks to the Personal Savings Allowance (PSA), introduced in 2016. The allowance is the amount of savings interest you can earn each tax year tax-free, on top of any interest in ISAs. The allowance depends on your marginal income tax band:
| Tax band | PSA | Tax on interest above PSA |
|---|---|---|
| Basic rate (20%) | £1,000 | 20% |
| Higher rate (40%) | £500 | 40% |
| Additional rate (45%) | £0 | 45% on all interest |
The calculator above automatically deducts tax at your marginal rate on any interest above your PSA — unless you tick the ISA box, in which case the interest is treated as fully tax-free.
How compound interest works
Compound interest means you earn interest on your interest as well as on your deposits. The effect accelerates over time: in the early years growth looks slow, in later years the curve steepens sharply. The formula for the future value of a savings pot with regular monthly deposits is:
FV = P(1+r)n + PMT × ((1+r)n − 1) / r
Where:
- FV = future value
- P = initial amount
- PMT = monthly deposit
- r = monthly interest rate (annual rate ÷ 12)
- n = number of months
Worked example — £5,000 initial, £200/month, 4%, 5 years
Starting with £5,000 and adding £200 a month at 4% annual interest (0.333% monthly) for 5 years (60 months):
- Total deposited: £5,000 + (£200 × 60) = £17,000
- Future value: £19,365
- Total interest earned: £2,365
For a basic-rate taxpayer, the £2,365 of interest is well within the £1,000 PSA — so no tax is due. For an additional-rate taxpayer with £0 PSA, the same interest would be taxed at 45% — costing £1,064 and leaving £1,301 net. This is why ISAs matter more the higher your tax band.
Cash ISA vs regular savings — which is better?
The right answer depends on three things: your tax band, your savings pot size, and the rates available. A simple decision tree:
If you are a basic-rate (20%) taxpayer
With the £1,000 PSA you can earn interest on up to £25,000 at 4% before paying any tax. Most basic-rate taxpayers will not exceed this and will not benefit much from a Cash ISA — unless the ISA itself offers the best rate on the market. Pick whichever pays the highest rate.
If you are a higher-rate (40%) or additional-rate (45%) taxpayer
The PSA drops to £500 or zero. Even modest savings pots can exceed the allowance. Cash ISAs become much more attractive because they shield interest from tax entirely. If your savings pot is large or you expect rates to stay high, prioritise maxing your £20,000 annual ISA allowance first.
If you are saving for a specific goal
Use the calculator to model when you will reach your target. For a £30,000 house deposit starting from £5,000 with £300/month at 4.5%, the calculator shows you reach the goal in about 5 years and 9 months. For shorter horizons, use a high-interest regular saver; for longer horizons consider Stocks & Shares ISA or a Lifetime ISA (which has a 25% government bonus for first-time buyers or retirement).
The £20,000 ISA allowance
Each tax year (6 April to 5 April) you can put up to £20,000 into ISAs. The allowance is use-it-or-lose-it — it does not roll over to the next tax year. You can split the allowance between Cash ISA, Stocks & Shares ISA, Innovative Finance ISA, and Lifetime ISA (capped at £4,000 per year). The Lifetime ISA is particularly powerful for first-time buyers or retirement: the government adds a 25% bonus on contributions up to £4,000 per year (effectively £1,000 of free money).
Inflation — the silent tax
The calculator shows nominal future value — the actual pounds you will have at the end. Inflation erodes the real purchasing power of those pounds. If inflation runs at 2% and your savings earn 4%, your real return is only 2% per year. Over 10 years, £10,000 saved at 4% nominal becomes £14,802 nominal but only £12,114 in today's purchasing power at 2% inflation. To see real future value in the calculator, subtract your expected inflation rate from the nominal rate before entering it.
What this calculator does not cover
This calculator models simple monthly-compounded savings. It does not cover: variable-rate accounts (we use a flat rate for the full term), tax-free accounts other than Cash ISA (Premium Bonds, NS&I Income Bonds, Lifetime ISA, Junior ISA), interest paid annually rather than monthly, fixed-term bonds with penalties for early withdrawal, or Stocks & Shares ISA growth (which is also tax-free but is not a "savings account"). Always check the specific terms of any account before committing.
Rates sourced from Bank of England data and HMRC publications listed on our methodology page.