How is interest income taxed in the UK?
Answered 11 March 2026
How is Interest Income Taxed in the UK?
The UK tax treatment of interest income differs depending on whether the recipient is an individual or a company, and whether they are UK-resident or non-resident.
What the Law Says
1. The Charge to Tax (Individuals)
Income tax is charged on interest under ITTOIA 2005, s.369(1). The person liable is the person receiving or entitled to the interest. Interest is classified as "savings income" for income tax purposes under ITA 2007, s.18, which defines savings income to include income chargeable under Chapter 2 of Part 4 of ITTOIA 2005 (interest).
Savings income and dividend income together form the highest part of a person's total income, with dividend income treated as the higher part of that.
2. Savings Rates of Income Tax
The savings rates of income tax mirror the main rates:
- Savings basic rate: 20%
- Savings higher rate: 40%
- Savings additional rate: 45%
3. Starting Rate for Savings (0%)
A 0% starting rate applies to up to £5,000 of savings income, available where an individual's non-savings income does not exceed their personal allowance plus £5,000. Every £1 of non-savings income above the personal allowance reduces the £5,000 band by £1.
4. Personal Savings Allowance (Savings Nil Rate)
A savings nil rate (0%) applies via the Personal Savings Allowance, introduced from 2016-17, under ITA 2007, s.12A:
- Basic rate taxpayers: first £1,000 of savings income at 0%
- Higher rate taxpayers: first £500 of savings income at 0%
- Additional rate taxpayers: no allowance
5. Companies — Loan Relationships
For companies within the charge to corporation tax, interest income is taxed under the loan relationships rules (CTA 2009, Part 5). These rules do not apply to individuals.
6. Non-Residents
Non-UK residents are chargeable to income tax on UK-source interest. When any person pays yearly interest to a non-UK resident, they are obliged to deduct income tax at source and account for it to HMRC under ITA 2007, s.874(2). This obligation may be reduced or removed by a double taxation agreement (DTA) or a claim under TIOPA 2010, s.182.
7. Exemptions
Notable exemptions from the charge to tax on interest include:
- National savings income (Part 6, Chapter 2)
- Income from Individual Savings Accounts (ISAs) (Part 6, Chapter 3)
- SAYE interest (Part 6, Chapter 4)
- Interest on FOTRA securities (Part 6, Chapter 6)
HMRC Guidance / Practice
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Bank and building society interest is paid gross to individuals — without deduction of basic rate income tax. Individuals can claim a repayment if savings income is taxable at the starting rate for savings but tax has been deducted.
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The HMRC Savings and Investment Manual (SAIM) covers the taxation of interest and other savings income for individuals and trusts (other than income received in the course of a trade), including interest on bank/building society accounts, government securities, and corporate bonds.
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For companies, the Corporate Finance Manual (CFM) covers the loan relationships rules; the SAIM applies only to individuals and trustees.
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For non-residents, DTAs may provide for exemption from UK tax or a reduced rate. The non-resident recipient must make a formal application for exemption or the reduced rate.
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A worked example from HMRC illustrates the ordering rules: employment income is taxed first, then savings income, then dividends. The personal savings allowance is applied to the first tranche of savings income before the standard rates apply.
Summary Table
| Taxpayer Type | Rate on Interest | Key Reliefs |
|---|---|---|
| Individual – basic rate | 20% | Up to £5,000 at 0% (starting rate); £1,000 PSA at 0% |
| Individual – higher rate | 40% | £500 PSA at 0% |
| Individual – additional rate | 45% | No PSA |
| Company | Corporation tax rates | Loan relationships rules (CTA 2009, Pt 5) |
| Non-resident individual | Income tax (deducted at source) | DTA relief may apply |
Citation sources
In the tax year 2019-20 Jane’s total income is £52,500. She has income of £46,000 from employment, savings income in the form of building society interest of £1,500 and dividends of £5,000. The personal allowance for 2019-20 is £12,500 and the threshold after which higher rate tax applies is £50,000. The 0% starting rate for savings band is £5,000. The personal savings allowance applies to savings income, including interest, up to £1,000 for basic rate taxpayers and up to £500 for higher rate ta
When calculating top slicing relief, the starting rate for savings and the personal savings allowance must also be considered. Despite their names, the personal savings allowance and the starting rate for savings are nil rate tax bands and are not treated as an ‘allowance’. Certain customers may receive up to £5,000 of savings income and not pay tax on it. This is called the starting rate for savings. The more you earn in other income (for example wages or pension), the less your starting rate f
From 2016-17 savings income not within the starting rate for savings may be covered by the personal savings allowance and charged to tax at 0%. The allowance applies to the first £1000 of savings income for basic rate taxpayers. For higher rate taxpayers the amount is £500 and there is no allowance for those taxable at the additional rate.
A non-resident is taxed on UK-source income. When any person pays yearly interest to a non-UK resident, they are obliged to deduct income tax from the payment and account for that tax to HMRC in accordance with ITA07/S874(2). This obligation can be removed or changed if the benefits of a double taxation agreement are successfully claimed - and (from 1 April 2004) by making a claim under TIOPA10/S182. This obligation applies to companies, local authorities and individuals. The tax is the liabilit
Where an individual’s non-savings income is less than the starting rate for savings limit, the savings income will be taxable at the 0% starting rate for savings up to the limit. From 6 April 2015 the limit is the individual’s personal allowance plus the starting rate band of £5,000. Where an individual’s non-savings income exceeds the starting rate for savings limit, the starting rate for savings is not available. Bank and building society interest is paid to individuals gross – without deducti
The loan relationships rules apply only to companies within the charge to corporation tax. This includes companies that are members of partnerships. The rules do not apply to individuals. See the Savings and Investment Manual (SAIM) for guidance on the taxation of interest and other forms of savings income in the hands of individuals. Non-resident companies come within the rules only if they fall within CTA09/S19.
The Savings and Investment Manual (“SAIM”) explains the taxation of various types of savings and investment income of individuals and trusts, other than that received in the course of a trade. The income dealt with in SAIM covers interest and other types of return received on cash deposits in bank and building society accounts, Government securities, and corporate bonds; dividends and other distributions received on shares and other types of equity holdings in a company, including amounts receiv
Part 4 Savings and investment income Chapter 2 Interest Charge to tax on interest Charge to tax on interest 369 1 Income tax is charged on interest. 2 The following sections extend what is treated as interest for certain purposes— section 372 (building society dividends), section 373 (open-ended investment company interest distributions), section 376 (authorised unit trust interest distributions), section 378A (offshore fund distributions), section 379 ( payments by registered societies or certa
Part 2 Basic provisions Chapter 2 Rates at which income tax is charged Income charged at particular rates Meaning of “savings income” 18 1 This section applies for the purposes of the Income Tax Acts. 2 “Savings income” is income— a which is within subsection (3) or (4), and b which is not relevant foreign income charged in accordance with section 832 of ITTOIA 2005 (relevant foreign income charged on the remittance basis). 3 Income is within this subsection if it is— a income chargeable under C