Tax on Savings When You're Retired: The £5,000 Starting Rate Most Miss

If your only income is the State Pension, you can usually receive around £6,000 of savings interest a year completely tax-free — and in some cases more. That is because three separate allowances stack on top of each other in 2026/27: the £12,570 Personal Allowance, the £5,000 starting rate for savings, and the Personal Savings Allowance of £1,000 for basic-rate taxpayers. The catch is that the starting rate shrinks pound for pound once your pension and other non-savings income climb above the Personal Allowance, which is why so many retirees miss it.

• Age makes no difference to your allowances any more — there is no special over-65 tax break on savings.
• The maximum tax-free combination in 2026/27 is £12,570 + £5,000 + £1,000 = £18,570 of total income, if enough of it is interest.
• The £5,000 starting rate for savings falls by £1 for every £1 of non-savings income above £12,570, and disappears entirely once that income reaches £17,570.
• Banks pay interest gross, so HMRC usually collects any tax through your tax code or a Simple Assessment letter — both of which can be wrong.
• Scottish taxpayers use Scottish rates on pension income but UK rates and allowances on savings interest.

Does being over 65 change the tax on your savings?

No. Age-related personal allowances for people born before 6 April 1938 were frozen and then withdrawn, and since 2016/17 everyone has had the same Personal Allowance regardless of age. So searches for "tax on savings over 65" have the same answer as for anyone else: it depends on your total income, not your birthday.

There is one genuine age-linked relief left. Married Couple's Allowance is available where at least one spouse or civil partner was born before 6 April 1935. It is given as a reduction in your tax bill rather than extra tax-free income, worth between £436 and £1,127 in 2026/27, and it reduces tax payable on savings interest just as it does on pension income.

What does change in retirement is the shape of your income. Most pensioners have a modest, predictable non-savings income and a larger pot of cash in the bank — exactly the profile the starting rate for savings was designed for.

The three allowances pensioners stack

UK income tax taxes income in a fixed order: non-savings income first (State Pension, private and workplace pensions, earnings, rental profit), then savings interest, then dividends. That order matters, because it decides how much of each allowance is left by the time your interest is taxed.

1. The Personal Allowance — £12,570

The first £12,570 of income is tax-free and it is frozen again in 2026/27. The full new State Pension is £241.30 a week, which is roughly £12,547.60 over 52 weeks — just below the allowance. If the State Pension is genuinely all you receive, a small slice of Personal Allowance is still unused, and that unused slice soaks up savings interest before anything else does.

2. The starting rate for savings — up to £5,000 at 0%

Sitting directly above the Personal Allowance is a £5,000 band of savings income taxed at 0%. It is not an allowance you claim; it is a rate band that applies automatically — but only to interest, and only if your non-savings income is low enough to leave room for it.

3. The Personal Savings Allowance — £1,000, £500 or nil

On top of that sits the Personal Savings Allowance (PSA): £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers and nil for additional-rate taxpayers. For Scottish taxpayers, which PSA you get is decided by the UK rate bands (the £50,270 higher-rate threshold), not the Scottish ones. There is more detail on how the PSA works generally in our guide to tax on savings interest and the Personal Savings Allowance.

ISA interest sits outside all of this. It is tax-free and does not use up any allowance or band, so it never affects the starting rate calculation.

Starting rate for savings explained

The rule is simple once you see it as a taper. Take your non-savings income (pensions, wages, rental profit, but not interest or dividends) and subtract your Personal Allowance. Whatever the excess is, knock it off £5,000. What remains is your starting rate band.

• Non-savings income of £12,570 or less → full £5,000 starting rate band.
• Non-savings income of £15,000 → excess of £2,430 → starting rate band of £2,570.
• Non-savings income of £17,570 or more → starting rate band of nil.

Here is the same thing as a table, showing how much interest a basic-rate retiree can receive before any tax is due.

Two points catch people out. First, the taper uses non-savings income only — a large pile of interest does not shrink your starting rate band, although it can push you into higher rate and cut your PSA to £500. Second, the starting rate band is not transferable between spouses and does not carry forward.

Worked examples

Margaret: State Pension only

Margaret receives the full new State Pension of £12,548 for the year and has £5,500 of building society interest. She has no other income.

• Non-savings income £12,548, against a Personal Allowance of £12,570 → £22 of allowance unused.
• Non-savings income does not exceed the allowance, so the full £5,000 starting rate band survives.
• PSA as a basic-rate taxpayer: £1,000.
• Interest of £5,500: £22 covered by leftover Personal Allowance, £5,000 taxed at 0% under the starting rate, the remaining £478 covered by the PSA.

Tax due: nil. Margaret could have received up to £6,022 of interest before paying anything.

Jean: State Pension plus a small private pension

Jean has the same £12,548 State Pension plus a £2,000 annuity, and £6,000 of interest.

• Non-savings income: £12,548 + £2,000 = £14,548. That is £1,978 above the Personal Allowance, taxed at 20% = £395.60.
• Starting rate band: £5,000 − £1,978 = £3,022 at 0%.
• PSA: £1,000 at 0%.
• Interest of £6,000: £3,022 + £1,000 = £4,022 at 0%, leaving £1,978 taxed at 20% = £395.60.

Total tax: £791.20. Note how a £2,000 pension has cost Jean £791 — because it is taxed itself and it also destroys £1,978 of the starting rate band. The effective rate on that slice of pension income is 40%.

David: the starting rate has gone

David has a £12,548 State Pension and an £8,000 workplace pension, plus £3,000 of interest.

• Non-savings income £20,548. Taxable at 20%: £20,548 − £12,570 = £7,978 → £1,595.60.
• Non-savings income is above £17,570, so the starting rate band is nil.
• PSA £1,000; the remaining £2,000 of interest is taxed at 20% = £400.

Total tax: £1,995.60. David is the typical case where people assume the £5,000 band applies and are surprised by a bill.

Scotland

If Jean lived in Scotland, her pension income would be taxed at Scottish rates — the 19% starter rate on the first £3,967 above the Personal Allowance, then 20% — but her savings interest would still be taxed under UK rules: the £5,000 starting rate at 0%, the £1,000 PSA, then 20%. The taper of the starting rate band works the same way.

How HMRC collects it, and claiming back tax you have paid

Banks and building societies have paid interest gross since April 2016, so nothing is deducted at source. Instead they report your interest to HMRC after the tax year ends. HMRC then either adjusts your PAYE tax code (usually against a private pension), issues a Simple Assessment letter asking for payment, or picks the interest up on your Self Assessment return.

That process goes wrong in predictable ways for retirees:

• Estimated interest in your tax code. HMRC often codes out last year's interest figure. If rates have fallen, a bond has matured or you have moved money into an ISA, you are paying tax on interest you will never receive.
• Fixed-rate bonds paying out in one lump. Several years of interest can land in a single tax year, blowing through the starting rate band and the PSA at once, and sometimes pushing you into higher rate so the PSA halves to £500.
• Joint accounts. Interest is normally split 50/50 between the account holders, regardless of who funded it. HMRC sometimes attributes the whole amount to one person.
• Tax deducted elsewhere. Interest paid as part of a compensation award, some trust income and certain annuity payments can still arrive with 20% tax already taken off, even when your allowances mean no tax was due.

Where tax has actually been deducted from savings or investment income and you were not liable, you reclaim it on form R40. See GOV.UK: claim a refund of Income Tax deducted from savings and investments. Claims can normally go back four tax years, so it is worth checking older years as well as the current one.

Where the problem is an over-taxing tax code rather than deducted tax, the fix is to give HMRC a realistic estimate of this year's interest through your Personal Tax Account so the code is corrected mid-year, rather than waiting for a refund after 5 April.

Finally, if your income from savings and investments is large, you may need to file a return in your own right — HMRC's threshold for reporting untaxed savings and investment income through Self Assessment is £10,000 for the year. Below that, a Simple Assessment or a coding adjustment is the usual route.

What to do next

Work out your own position before you accept an HMRC figure. Add up your pension income for the year, subtract £12,570, knock the excess off £5,000 and add your PSA — that is your tax-free interest headroom. Our savings interest tax calculator does the stacking for you, including the starting rate taper and the Scottish rates on pension income.

If you think you have already paid too much, run a savings tax check to see whether your allowances were applied correctly, and read the wider Personal Savings Allowance guide for how interest interacts with dividends and higher-rate thresholds.