Do Banks Deduct Tax on Interest

Find out if banks deduct tax on interest in the UK and how savings income is taxed under the Personal Savings Allowance.

If you have money in a UK savings account, cash ISA or other interest-bearing product, you may wonder whether the bank deducts tax from the interest you earn. This is especially relevant if you are managing your overall tax position or submitting a Self Assessment return.

In the UK, most savings interest is now paid gross, meaning that banks do not deduct tax at source. Instead, the responsibility falls to the individual taxpayer to pay any tax owed, if their interest exceeds their tax-free allowances. The system has become simpler for many people, particularly basic rate taxpayers, but it is still important to understand how savings income is treated.

This article explains whether banks deduct tax on interest, how the Personal Savings Allowance works, what types of accounts are affected, and what you need to report to HMRC.

Interest Income and UK Tax

Interest from UK savings accounts is considered savings income. This includes:

  • Interest from high street and online bank savings accounts

  • Fixed-rate bonds and notice accounts

  • Interest on current accounts that pay rewards

  • Interest earned from credit unions

  • Peer-to-peer lending interest

  • Interest from government-backed savings (such as NS&I products not inside ISAs)

If your interest exceeds your tax-free allowance, you must pay tax on the excess. However, tax is not automatically deducted by the bank in most cases.

What Is the Personal Savings Allowance?

Since April 2016, most UK taxpayers benefit from the Personal Savings Allowance (PSA). This is a tax-free amount of savings interest you can earn each year before paying tax.

The allowance depends on your Income Tax band:

  • Basic rate taxpayers (20%): £1,000 tax-free interest

  • Higher rate taxpayers (40%): £500 tax-free interest

  • Additional rate taxpayers (45%): No allowance

For example:

  • If you earn £750 in interest and are a basic rate taxpayer, you pay no tax

  • If you earn £1,200 in interest and are a basic rate taxpayer, you pay tax on £200

  • If you earn £600 in interest and are a higher rate taxpayer, you pay tax on £100

The PSA is automatically applied, and most people do not need to do anything unless they exceed their allowance.

Do Banks Deduct Tax on Interest?

No. Banks and building societies now pay interest gross, meaning they pay the full amount of interest to you without deducting any tax at source. This applies to:

  • Standard savings accounts

  • Fixed-term accounts

  • Instant access and notice accounts

If you are a taxpayer and your interest exceeds your allowance, you are responsible for declaring the excess and paying any tax due.

This is a change from the system used before April 2016, when banks deducted basic rate Income Tax (20%) from interest before paying it to savers.

Do Banks Tell HMRC About Interest?

Yes. Banks and building societies report the total interest you earn each tax year directly to HMRC. This means:

  • HMRC knows how much interest you have received

  • Your tax code may be adjusted if you are employed or receive a pension

  • If you are self employed or have other untaxed income, you may be expected to report interest on your Self Assessment tax return

HMRC uses this information to automatically collect tax on savings where possible. If your interest is just slightly over the PSA, they may collect the tax through an adjustment to your tax code, rather than requiring a full return.

You can check your interest income through your personal tax account with HMRC.

When Do You Need to Report Interest?

You must report your interest to HMRC if:

  • Your total taxable interest exceeds your PSA

  • You are an additional rate taxpayer with no PSA

  • You already submit a Self Assessment tax return for other reasons

  • HMRC asks you to report it

In these cases, include the gross amount of interest earned on your tax return. You only pay tax on the amount above your allowance.

If your interest is below the allowance, there is usually nothing to report. However, it is still important to keep records in case HMRC queries your total income or you switch tax bands during the year.

How Is Interest Taxed?

Any interest above your allowance is taxed at your marginal rate:

  • Basic rate: 20%

  • Higher rate: 40%

  • Additional rate: 45%

The amount you pay depends on your total taxable income for the year, including earnings, pensions, rental income, dividends and savings.

Interest from savings accounts is not subject to National Insurance.

What About ISAs?

Interest from an Individual Savings Account (ISA) is completely tax free, regardless of how much you earn or your tax band. There is no need to report ISA interest to HMRC, and it does not count towards your PSA.

ISA limits for 2024/25 remain at £20,000 per tax year, which can be split between cash ISAs, stocks and shares ISAs or innovative finance ISAs.

Many savers use ISAs to protect larger savings balances from tax, especially once their PSA is used up.

Non-UK Interest

Interest from foreign savings accounts is not covered by the UK’s PSA and must be declared in full on your Self Assessment return. Tax may also be due in the country where the interest arose, so you may need to consider double taxation rules.

If you hold offshore accounts or receive foreign bank interest, you must declare it to HMRC, even if no tax was deducted abroad.

Joint Accounts and Interest Splitting

For joint accounts, interest is usually split equally between the account holders, unless you can prove you have contributed different amounts and have a formal agreement in place.

Each person uses their own PSA against their share of the interest. For example, if a couple earns £1,500 interest on a joint account:

  • Each is treated as having earned £750

  • If both are basic rate taxpayers, the full amount is covered by their PSAs

Keep this in mind if you are managing joint savings or trying to make the most of each partner’s allowance.

Conclusion

In the UK, banks no longer deduct tax on interest payments. Instead, they pay interest gross and report your total interest to HMRC. Most savers benefit from the Personal Savings Allowance, which gives basic and higher rate taxpayers a tax-free amount of interest each year. You only pay tax if your interest exceeds your allowance, and in many cases, this is collected through your tax code or Self Assessment.

To stay on top of your tax obligations:

  • Monitor your total interest across all accounts

  • Understand your PSA and income tax band

  • Report interest where required, especially if you are self employed or an additional rate taxpayer

Using ISAs and spreading savings between spouses or civil partners can help reduce your exposure to tax on interest income. If you are unsure how your interest affects your tax position, speak to an accountant or check your HMRC personal tax account for clarity.