UK Savings Calculator

How Savings Interest Works in the UK

When you deposit money into a savings account, the bank or building society pays you interest as a reward for keeping your money with them. They use your deposits to fund loans and mortgages, and the interest rate reflects the return they can generate and the competitive landscape for savers.

In the UK, savings interest is calculated on the balance in your account and is typically compounded daily or monthly. This means that interest earned in one period is added to your balance and earns interest itself in subsequent periods. Over time, this compounding effect can significantly boost your savings.

Since April 2016, all UK banks and building societies pay savings interest gross, meaning they do not deduct tax before paying interest into your account. Any tax owed on savings interest above your Personal Savings Allowance is collected by HMRC, usually through an adjustment to your PAYE tax code or via self-assessment.

The interest rate offered on your savings depends on several factors including the Bank of England base rate, the type of account (fixed-rate, easy access, regular saver, or ISA), how much you deposit, and the competitive environment between banks. In 2025, savings rates have been notably higher than the near-zero rates that prevailed for much of the previous decade, providing a genuine opportunity for savers to grow their money meaningfully.

Personal Savings Allowance Explained

The Personal Savings Allowance (PSA) was introduced in April 2016 and allows UK residents to earn a certain amount of savings interest each tax year without paying any tax on it. The allowance depends on your income tax band:

The PSA covers interest from bank and building society accounts, corporate bond funds, government bond funds, and peer-to-peer lending platforms. It does not cover ISA interest (which is already tax-free) or dividend income (which has its own separate allowance).

To put the PSA in context: at a 4.5% interest rate, a basic rate taxpayer could hold approximately £22,222 in savings before their interest exceeds the £1,000 PSA. A higher rate taxpayer could hold approximately £11,111 before exceeding their £500 allowance. If your savings are below these thresholds, you will pay no tax on your savings interest at all.

There is also a starting rate for savings of up to £5,000 at 0% tax for people with low non-savings income. This is reduced by £1 for every £1 of non-savings income above the Personal Allowance (£12,570). If your earned income is £17,570 or more, the starting rate does not apply to you. Combined with the PSA, a person with very low income could potentially earn up to £6,000 in savings interest tax-free (£5,000 starting rate + £1,000 PSA).

ISA vs Regular Savings: Which Is Better?

One of the most common questions from UK savers is whether they should use a Cash ISA or a regular savings account. The answer depends on your circumstances, particularly your tax band and the total amount of savings interest you expect to earn.

Cash ISA Advantages

• All interest is completely tax-free, regardless of amount
• No impact on your Personal Savings Allowance
• You can save up to £20,000 per tax year
• Previous years' ISA savings can be transferred without affecting the current year's allowance
• Particularly valuable for higher and additional rate taxpayers

Regular Savings Account Advantages

• Often offer higher interest rates than equivalent ISAs
• No annual allowance limit on deposits
• If your interest is within the PSA, you pay no tax anyway
• More product variety and competition

For basic rate taxpayers with relatively modest savings (where total interest stays under £1,000), a regular savings account with a higher rate may be the better choice. For higher and additional rate taxpayers, or anyone with substantial savings where interest exceeds the PSA, ISAs provide a meaningful tax benefit.

Consider this example: you have £30,000 in savings earning 4.5% interest (approximately £1,381 per year). As a basic rate taxpayer, £381 of this interest would be taxable (above the £1,000 PSA), costing you about £76 in tax. In a Cash ISA, the full £1,381 would be tax-free. If the ISA rate is even slightly lower than the non-ISA rate, you would need to compare the tax saving against the lower interest earned to determine which is better.

Types of UK Savings Accounts

Easy Access Savings

Easy access accounts let you deposit and withdraw money freely without notice or penalty. They typically offer competitive variable rates that can change at any time. These are ideal for emergency funds or short-term savings goals where you may need quick access to your money. Most easy access accounts compound interest daily or monthly.

Fixed-Rate Bonds

Fixed-rate bonds (also called fixed-term deposits) lock your money away for a set period — usually 1, 2, 3, or 5 years — at a guaranteed interest rate. They typically offer the highest rates but you cannot access your money early without paying a penalty (or at all, depending on the provider). These are suitable for money you know you will not need for the fixed term.

Regular Saver Accounts

Regular saver accounts require you to deposit a set amount each month (usually between £25 and £300). They often advertise attractive headline rates, but because you are building up your balance gradually over the year, the actual interest earned is roughly half what you might expect from the headline rate applied to the maximum balance. Nevertheless, they are excellent for developing a savings habit.

Cash ISAs

Cash ISAs are savings accounts where all interest is tax-free. They come in easy access, fixed-rate, and regular saver varieties. You can save up to £20,000 across all ISA types in each tax year (2025/26). The ISA allowance does not roll over — if you do not use it, you lose it. You can, however, transfer existing ISA savings between providers to get better rates without affecting your current year's allowance.

Notice Accounts

Notice accounts require you to give advance notice (typically 30, 60, 90, or 120 days) before making withdrawals. They typically offer better rates than easy access accounts as a trade-off for the reduced flexibility. Some notice accounts allow immediate withdrawals with a penalty (usually forfeiting the notice period's interest).

Best Savings Rates in 2025/26

Savings rates in the UK are influenced primarily by the Bank of England base rate and competition between providers. Following the series of base rate increases from 2022 to 2023, savings rates reached their highest levels in over a decade. While rates may fluctuate, the environment remains considerably more favourable for savers than the near-zero rate era.

As a general guide for 2025, competitive rates by account type are approximately:

Always compare rates using the AER (Annual Equivalent Rate) rather than the gross rate, as AER accounts for compounding frequency and gives a standardised comparison. Rates change frequently, so check a comparison site for the latest offerings.

The Compound Interest Effect on Savings

Compound interest is the process by which interest earned on your savings generates its own interest in subsequent periods. This creates an exponential growth curve rather than a linear one, and the effect becomes more pronounced over longer time periods.

Consider the following example of £10,000 initial savings with £200 per month at 4.5% AER:

Notice how the interest earned accelerates over time. In the first year, you earn about £516 in interest. By the time you reach year 30, you have earned £68,350 in total interest — nearly as much as your total deposits. This is the power of compound interest working in your favour.

Tax on Savings Interest in the UK

Understanding how savings interest is taxed is essential for maximising your returns. In the UK, the tax treatment of savings interest depends on your income tax band, the type of account, and your total interest earned in the tax year.

Here is a step-by-step guide to working out your tax on savings:

1. Add up all your savings interest from all non-ISA accounts (banks, building societies, NS&I, peer-to-peer platforms).
2. Check if the starting rate for savings applies. If your non-savings income is below £17,570, you may qualify for up to £5,000 of interest at 0% tax.
3. Apply your Personal Savings Allowance. Deduct £1,000 (basic rate), £500 (higher rate), or £0 (additional rate) from your remaining taxable interest.
4. Tax the rest at your marginal income tax rate: 20% for basic rate, 40% for higher rate, or 45% for additional rate.

Example: Basic Rate Taxpayer

Tom earns £35,000 per year and has £40,000 in savings at 4.5%. His annual interest is approximately £1,836.

• Starting rate: does not apply (income above £17,570)
• PSA: £1,000 tax-free
• Taxable interest: £1,836 - £1,000 = £836
• Tax at 20%: £836 x 0.20 = £167.20
• Net interest: £1,836 - £167.20 = £1,668.80

If Tom moved his savings to a Cash ISA earning 4.2%, his annual interest would be approximately £1,713 — all tax-free. Despite the lower rate, Tom keeps more money in the ISA (£1,713 vs £1,668.80).

Example: Higher Rate Taxpayer

Sarah earns £80,000 and has £50,000 in savings at 4.5%. Her annual interest is approximately £2,300.

• PSA: £500 tax-free
• Taxable interest: £2,300 - £500 = £1,800
• Tax at 40%: £1,800 x 0.40 = £720
• Net interest: £2,300 - £720 = £1,580

For Sarah, a Cash ISA is clearly beneficial. Even at a slightly lower rate of 4.0%, she would earn £2,040 in tax-free interest, keeping £460 more than with her taxable account.

Worked Examples

Example 1: Building an Emergency Fund

Lisa wants to build a three-month emergency fund of £6,000. She starts with nothing and can save £300 per month in an easy access account paying 4.3%.

• Initial savings: £0
• Monthly deposit: £300
• Interest rate: 4.3%
• Account type: Easy access
• Tax band: Basic rate

After 20 months (just under 2 years), Lisa reaches her £6,000 target. Over 2 full years, her balance reaches £7,497. She earns approximately £297 in gross interest, all within her £1,000 PSA and therefore tax-free.

Example 2: Maximising ISA Allowance

David is a higher rate taxpayer who wants to make the most of his ISA allowance. He deposits £15,000 at the start of the tax year and adds £416 per month (to reach the £20,000 annual limit).

• Initial savings: £15,000
• Monthly deposit: £416
• Interest rate: 4.2%
• Account type: Cash ISA
• Tax band: Higher rate
• Period: 3 years

After 3 years, David's ISA balance grows to approximately £35,880. He earns about £890 in tax-free interest. If he had used a regular savings account, he would have paid approximately £130 in tax on interest above his £500 PSA.

Example 3: Long-Term Fixed Rate Strategy

Margaret has £50,000 in savings and wants to lock it away in a fixed-rate bond for 5 years at 4.8%. She is a basic rate taxpayer and makes no additional deposits.

• Initial savings: £50,000
• Monthly deposit: £0
• Interest rate: 4.8%
• Account type: Regular savings
• Tax band: Basic rate
• Period: 5 years

After 5 years, Margaret's balance is approximately £62,050. She earns about £13,350 in gross interest over the period. Each year, approximately £1,300 of interest exceeds her £1,000 PSA, resulting in annual tax of about £260 (20%). Her total tax over 5 years is approximately £1,300, leaving her with net interest of about £12,050.

Common Mistakes When Saving

1. Not Shopping Around for Rates

Many savers leave money in accounts paying 0.5% or less when they could earn 4-5% elsewhere. The difference between 1% and 4.5% on £20,000 over 5 years is approximately £3,700 in extra interest. Always compare rates and be prepared to switch accounts regularly to get the best deal.

2. Ignoring the ISA Allowance

Higher and additional rate taxpayers who do not use their ISA allowance are effectively paying unnecessary tax on their savings interest. The £20,000 annual ISA allowance is a valuable tax shelter. Even if ISA rates are slightly lower, the tax saving often makes them the better choice. Your ISA allowance resets each tax year and cannot be carried forward — use it or lose it.

3. Forgetting About Inflation

A savings account paying 4% sounds attractive, but if inflation is 3%, your real return is only 1%. Over long periods, inflation can significantly erode the purchasing power of your savings. For long-term savings goals beyond 5 years, consider whether a stocks and shares ISA or pension might offer better inflation-beating returns, accepting the associated risk.

4. Not Having an Emergency Fund First

Before locking money away in fixed-rate bonds or investing, make sure you have 3-6 months of essential expenses in an easy access account. Without this buffer, you may need to break into fixed savings early (incurring penalties) or take on expensive debt to cover unexpected expenses.

5. Confusing Headline Rates with Actual Returns

Regular saver accounts often advertise rates of 6-7%, but because you deposit money gradually over the year, the effective return on the total saved is roughly half the headline rate. A regular saver at 6% on £200/month deposits earns approximately £78 of interest over a year — not the £144 you might expect from 6% on £2,400. Always calculate or check the actual interest you will receive.