Savings interest calculator — methodology

Interest is the second slice of income, and that is the whole calculation

Income is not taxed in the order it arrives. It is taxed in a fixed order, and savings interest sits in the middle of it:

earned and other income  →  savings interest  →  dividends

Everything below the interest decides which band the interest meets. That is why the same £5,000 of interest can cost nothing to one person and the higher rate to another, and why a calculator that asks only for an interest figure cannot be right for anybody who also has a salary or a pension.

The two nil-rate bands, in the order they apply

1. The starting rate for savings — a band of £5,000 taxed at 0.00%, reduced £1 for every £1 of taxable non-savings income:

   starting rate band = max(0, £5,000 − taxable non-savings income)

   So it is gone entirely once taxable non-savings income reaches £5,000 — roughly a salary of £17,570 — and it is worth up to £1,000 of tax to someone below that.
2. The personal savings allowance — £1,000 at the basic rate, £500 at the higher rate and £0 at the additional rate. Which one applies is decided by total taxable income, the interest included, and always against the UK-wide bands. A Scottish intermediate-rate taxpayer is a UK basic-rate taxpayer for this purpose.

Both are bands, not deductions. Interest they cover is taxed at 0% and still occupies room in the stack, so filling an allowance pushes the income above it further up the schedule rather than sliding everything down.

Why an unused allowance is not spare tax-free interest

The personal savings allowance is a step function of the income it is set by, and the interest is part of that income. So the allowance falls as interest rises: at £17,570 of income it is £1,000, and receiving enough interest to cross the higher-rate threshold makes it £500 — retrospectively, for the whole year.

A page that printed “£1,000 of allowance remaining” under a heading like headroom would therefore be inviting the reader to do the one thing that makes the figure untrue. The calculator refuses to caption it that way: where a reader obviously wants that question answered, it runs the whole calculation again with the extra interest included and reports the measured difference. The figure it shows is a recomputation, not a rate applied to a remainder.

Distance to the next threshold, converted

The engine reports the distance to the next band in taxable income, and the reader has gross income. The two differ by any unused personal allowance, and inside the £100,000 taper they differ by a factor: each extra £1 of income also withdraws 50p of allowance, so it exposes £1.50 to tax. Taxable income as a function of gross income is

f(gross) = gross − personalAllowance(gross)

which is piecewise linear and strictly increasing, so it inverts in closed form. Every figure the page shows under “another £X of income takes you into…” is f⁻¹(target) − gross, with the taxable figure shown beside it and named as the other measure. The inverse does not model the statutory round-up of the surviving allowance (ITA 2007 s.35(3)), so it can sit up to about £1 from the income that exactly reaches the threshold — which is below the precision of a figure shown to the nearest pound.

The step, and why it is located rather than derived

The personal savings allowance is a step function of the income it is set by, not a taper. There is a single pound of income at which it falls, and the pound before it and the pound after it are taxed very differently — the calculator prices both, because the difference between them is the number a reader deciding whether to take extra work actually needs.

The step sits at a threshold of taxable income, and the reader has gross income, so the obvious approach is to convert the threshold and read off the pound either side. That is not good enough here. The inverse above is honest to about a pound, and a one-pound error puts the measurement on the wrong side of the step — reporting the ordinary marginal rate where the answer is two orders of magnitude larger, with nothing on screen to suggest anything went wrong.

aim:      d ≈ f⁻¹(next step in the allowance) − gross income
locate:   the first d where allowance(d) < allowance(d − £1)
measure:  tax(d) − tax(d − £1),  against  tax(d − £1) − tax(d − £2)

The conversion is used only to aim. The crossing pound is then found by asking the engine which pound actually moves the allowance, over a short window around the estimate, and both costs are differences between two complete calculations. So the figure is exact where a derived one would have been nearly right, and it stays exact if a future rules file moves the threshold or changes how the allowance steps.

Where no step remains above the reader’s income — an additional-rate taxpayer has no allowance left to lose — the page says so rather than showing a figure.

A dated change this page will have to take: 6 April 2027

Savings income stops sharing a rate schedule with earned income on 6 April 2027, and property income — which this calculator does not model at all — is taxed after other income but before savings from the same date. The stacking order at the top of this page therefore gains a step in the middle of it, and the rates charged on interest stop matching the rates charged on a salary. HMRC set both out in Change to tax rates for property, savings and dividend income, published 26 November 2025 and linked in the sources below.

It is recorded here, and in packages/tax-core/VERIFICATION.md, because it is a schema change rather than a change of figures: the rules files currently assume savings rates mirror earned rates, there is no property income type to hold a third schedule, and the beneficial allocation of the personal allowance becomes partly constrained. None of that is a rules-file edit, and this is the page most affected by all three.

The starting rate for savings and the personal savings allowance are not changed by it, so everything above about those two bands survives the change. Nothing in this site’s copy states a savings rate, so the tables here will report whatever the rules files contain — and the savings rows and the earned-income rows below are printed separately rather than as one figure, so the year they stop agreeing is the year this page starts saying so.

Turning a balance into a year of interest

The tax calculation runs on an interest figure. Where the reader gives a balance and a rate instead, the interest is

interest = balance × AER

for one tax year — simple, uncompounded, on a balance that does not move. A quoted AER already includes the account’s own within-year compounding, so this is the year’s interest for a pot left alone. It is not a projection: nothing is carried into a second year, and the page offers a second field for anyone whose statement disagrees with the arithmetic.

Rates and allowances

Thresholds are taxable income, after allowances. The two savings rows are printed separately and deliberately: they are the same figures, because income tax on savings income is reserved and the Scottish rates apply to earned income only. If a future rules file ever made them differ, this table would say so rather than the page continuing to claim they are identical.

Sources

• gov.uk — Tax on savings interestThe personal savings allowance by band, the starting rate for savings, and the fact that banks pay interest gross.
• gov.uk — Income tax rates and allowances: current and past
• gov.scot — Scottish income tax rates and bandsCited because the region selector offers Scotland. The Scottish rates change the earned-income part of the calculation and never the savings part: income tax on savings income is reserved.
• gov.uk — Individual Savings AccountsFor the subscription limit, and because ISA interest is outside this calculation entirely.
• gov.uk — Change to tax rates for property, savings and dividend income (technical note)Published 26 November 2025. The authority for the 6 April 2027 change described above. It is cited as a forthcoming change and none of its figures is used by any calculation on this site yet.

What it does not do

• ISA interest. Outside the calculation entirely — not taxed, not counted towards either allowance, and not part of the income that decides which allowance applies. It does not belong in the balance box.
• Dividends and capital gains. Both have their own schedules and both sit above interest in the stack. The dividend tax calculator takes salary, interest and dividends together.
• Pension contributions and Gift Aid. Neither is modelled, and both extend the basic-rate band — which is the main lawful way a reader near a threshold keeps the larger personal savings allowance. This page overstates the tax of anyone relying on either.
• The timing. Interest is taxed in the year it is credited, which for a multi-year fixed-rate bond may be a year the reader is not expecting. And banks have paid interest gross since April 2016, so HMRC usually collects by adjusting a tax code or through self assessment, often a year later. This page gives the amount, not the schedule.
• National Insurance, because none is charged on savings interest at any level of income — so this is an omission only in the sense that there is nothing to omit.
• Joint accounts, trusts, children’s accounts, the marriage allowance, the blind person’s allowance and the high income child benefit charge.