How does the UK taxation of savings interest work, including the Starting Rate?

Interest earned from savings accounts (like bank accounts, building societies, or cash ISAs) is treated differently from employment income and is subject to specific allowances and rates in the UK.

1. Personal Savings Allowance (PSA):

Every UK taxpayer is entitled to a Personal Savings Allowance (PSA), which shields a certain amount of savings interest from tax. The PSA amount depends on the individual's income tax band:

If your interest income is within your PSA, you pay 0% tax on it.

2. Starting Rate for Savings:

If you have income from employment or pension that falls below a certain threshold, you may qualify for the Starting Rate for Savings, which allows you to earn savings interest tax-free in addition to the PSA. For the 2024/25 tax year, the Starting Rate for Savings is available if your non-savings, non-dividend income is USD 17,570 or less.

If you qualify, you can earn up to USD 5,000 of savings interest tax-free. This USD 5,000 is taxed at 0% (the starting rate), and then the PSA applies to any further interest earned.

3. Taxation Above Allowances:

Any savings interest received above the PSA (and the Starting Rate, if applicable) is taxed at your marginal income tax rate (8.75%, 33.75%, or 39.35%).

4. Cash ISAs:

Interest earned within a Cash ISA remains completely tax-free, regardless of the amount earned, provided it stays within the annual ISA subscription limit (currently USD 20,000).

HMRC Reporting: Most banks and building societies pay interest gross (before tax). If you are a basic rate taxpayer, they may pay interest gross, as you can use your PSA to cover the tax. If you are a higher or additional rate taxpayer, they will usually deduct basic rate tax (20%), which you then need to reclaim or account for via Self-Assessment if the interest exceeds your PSA.