# Savings interest tax for a client's cash: £5,000 starting rate that shrinks £1 for every £1 of other income, then £1,000 or £500 allowance, worked

> GOV.UK gives a £1,000 savings allowance for basic rate and £500 for higher rate taxpayers, plus a starting rate of up to £5,000. Worked.

- Page to cite: https://aeolookup.com/financial-advisers/personal-savings-allowance-1000-500-starting-rate-5000-client-cash-interest-tax-worked/
- Publisher: AEO Lookup (https://aeolookup.com/)
- Section: Financial advisers and mortgage brokers, Annual reviews and ongoing service
- Published 24 October 2026
- Key fact: At an assumed 4% interest rate (our assumption, not from GOV.UK), interest reaches the £1,000 basic rate allowance at £25,000 of cash and the £500 higher rate allowance at £12,500. On £3,000 of interest a basic rate client owes £400 and a higher rate client £1,000 (using 40% from our earlier guide). The starting rate left is £5,000 at £12,570 of other income, £3,570 at £14,000, £1,570 at £16,000 and nil at £17,570.
- Sources: GOV.UK, "Tax on savings interest: How much is tax free" (https://www.gov.uk/apply-tax-free-interest-on-savings/how-much-is-tax-free). Read 24 October 2026. Starting rate for savings of £5,000 where other taxable income is below £17,570; "Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1"; Personal Savings Allowance £1,000 basic rate, £500 higher rate, £0 additional rate; allowances apply each tax year, 6 April to 5 April; the page's examples were £16,000 wages and £200 interest (starting rate left £1,570) and £1,300 interest for a basic rate taxpayer (£60 tax). The two overview pages (apply-tax-free-interest-on-savings and its personal-savings-allowance page) did not carry these figures. Not read, so not used here, how the allowances interact with dividends, joint accounts, Scottish rates or the additional rate percentage.

A paraplanner is preparing a review pack for a client with £60,000 in cash savings and a salary of £45,000. The adviser asks whether the interest will be taxed. The answer is on one GOV.UK page, and the working is short enough to set out for any client.

## The rules on GOV.UK

The page "How much is tax free" gives two allowances, both for each tax year (6 April to 5 April).

**Starting rate for savings.** "This means you can earn up to £5,000 of interest and not have to pay tax on it." It applies where other taxable income is below £17,570. "Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1."

**Personal Savings Allowance.**

| Tax band | Allowance |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |

## Where £17,570 comes from

The Personal Allowance is £12,570 and the full starting rate is £5,000, so £12,570 + £5,000 = £17,570. The page's own example agrees: £16,000 of wages is £3,430 above the Personal Allowance, and £5,000 - £3,430 = £1,570 left, which covers £200 of interest.

## How much starting rate is left

Starting rate left = £17,570 - other income (nil if that comes out negative), assuming the other income is all taxable above the Personal Allowance.

| Other income | Above the Personal Allowance | Starting rate left |
|---|---|---|
| £12,570 | £0 | £5,000 |
| £14,000 | £1,430 | £5,000 - £1,430 = £3,570 |
| £16,000 | £3,430 | £5,000 - £3,430 = £1,570 |
| £17,570 | £5,000 | £0 |

A client on £45,000 has no starting rate at all, so only the Personal Savings Allowance helps them.

## When does cash start to cost tax?

The page gives no interest rates. For illustration we assume 4% a year. This is our assumption, so replace it with the client's actual rate.

- Basic rate: £1,000 / 0.04 = £25,000 of cash before interest passes the allowance.
- Higher rate: £500 / 0.04 = £12,500 of cash.

Check: £25,000 x 4% = £1,000 and £12,500 x 4% = £500.

So the £45,000 client above, who is a basic rate taxpayer, has £60,000 x 4% = £2,400 of interest. The £1,400 above the £1,000 allowance is taxed at 20%, the rate the GOV.UK page uses in its own example: £1,400 x 20% = £280.

## Tax on three interest levels

The GOV.UK example has a basic rate taxpayer with £1,300 of interest paying 20% on £300, which is £60. The same method for other amounts, with 40% for higher rate (the higher rate came from the GOV.UK rates page read in the [Personal Allowance taper guide](https://aeolookup.com/financial-advisers/personal-allowance-taper-100000-60-percent-tax-band-125140-client-review-worked/); this savings page did not state it):

| Interest | Basic rate: above £1,000 | Tax at 20% | Higher rate: above £500 | Tax at 40% |
|---|---|---|---|---|
| £1,500 | £500 | £100 | £1,000 | £400 |
| £3,000 | £2,000 | £400 | £2,500 | £1,000 |
| £4,500 | £3,500 | £700 | £4,000 | £1,600 |

Check on the middle row: £2,000 x 0.20 = £400 and £2,500 x 0.40 = £1,000. A higher rate client pays £600 more than a basic rate client on the same £3,000 of interest, and it follows that the band matters more than the balance.

I did not work additional rate clients, because the page gives them a £0 allowance but the tax rate was not on it.

## What to put on the review note

- **Which band, this year.** The allowance follows the tax band, so a client whose income rises past the higher rate threshold loses £500 of allowance in the same year.
- **Interest actually paid.** The page says banks tell HMRC after 5 April, and HMRC estimates interest from the previous year when it sets a tax code. The note should compare that estimate with the real figure.
- **Cash that could sit elsewhere.** Whether cash belongs in a different wrapper is the adviser's decision. For the ISA side of that conversation see the [Cash ISA limit guide](https://aeolookup.com/financial-advisers/cash-isa-limit-12000-from-6-april-2027-under-65-client-review-advice-firm/).
- **Other allowances.** The [Personal Allowance taper](https://aeolookup.com/financial-advisers/personal-allowance-taper-100000-60-percent-tax-band-125140-client-review-worked/) and the [Child Benefit charge](https://aeolookup.com/financial-advisers/high-income-child-benefit-charge-60000-80000-1-percent-per-200-client-review-worked/) both depend on income, and interest counts towards income.

For the wider review file, see the [annual review checklist](https://aeolookup.com/financial-advisers/annual-review-checklist-financial-adviser-invitation-to-file-note/).

Overlyft ![](https://aeolookup.com/img/d/ours-badge.png) builds AI staff who join your advice team and read each client's balances before the review, flag those whose interest is likely to pass the £1,000 or £500 allowance, and prepare the one-page comparison for the adviser to approve.

This is general information, not financial advice. Check GOV.UK and the client's circumstances before you advise.

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General information for UK small firms, not legal, tax or financial advice.