How is savings interest taxed for a sole trader?

Many sole traders keep a cash reserve for tax bills, slow months and equipment. When it sits in a savings account it earns interest, and that interest can be taxed. The rules are different from the ones a limited company follows, and most guides cover only the company side.

This page uses the rates for England, Wales and Northern Ireland for the 2026 to 2027 tax year. The interest rate and the profits in the examples are assumptions chosen to show the method.

How is savings interest taxed for a sole trader?

For tax, a sole trader and the business are the same person. Interest on a savings account is added to your other income, which for most owners is trading profit. It is then tested against the allowances below. GOV.UK says whether you pay tax depends on how much interest you earn, your other taxable income and your tax-free allowances.

HMRC adds together the interest from all your savings accounts to work out your total. Interest on an ISA is not usually taxed and is left out.

What is the Personal Savings Allowance?

It is the amount of savings interest you can earn without paying tax. It depends on the Income Tax band you are in, and it applies each tax year, which runs from 6 April to 5 April.

Interest above your allowance is taxed at the rate for your band. Your band depends on your total income, so a good year of profit can move you from £1,000 to £500 of allowance. Scottish Income Tax bands are different, so Scottish taxpayers should check their own bands. Our Save tax page lists the other allowances and reliefs a sole trader can use.

What is the starting rate for savings?

It is a second allowance for owners with lower profits. GOV.UK says up to £5,000 of interest may be tax free if your other taxable income is below £17,570. Other income means income such as trading profit, and it does not include savings interest or dividends.

Every £1 of other income above your Personal Allowance reduces the starting rate by £1. With a Personal Allowance of £12,570, an owner with a profit of £14,000 has £1,430 above it. The starting rate is then £5,000 less £1,430, which is £3,570. The £1,200 of interest in our example falls inside that, so no tax is due. At a profit of £17,570 or more the starting rate is gone.

What does it cost in pounds?

Take £30,000 of business cash in a savings account. At an assumed 4%, it earns £1,200 in a year. Two owners hold the same pot, one paying basic rate tax and one paying higher rate.

The same savings cost one owner £40 and the other £280. The pot, the account and the interest rate are identical, so the difference is entirely the allowance. That is why a reserve sized for a good year of profit can cost more tax than the owner expects.

When does a cash ISA help?

Interest earned inside an ISA is not usually taxed. GOV.UK says the most you can save in ISAs in the 2026 to 2027 tax year is £20,000. You cannot hold an ISA jointly with someone else.

An ISA helps most when your interest would otherwise go above your allowance. Here is the higher rate owner from the example, with £20,000 of the pot moved into a cash ISA.

The ISA interest of £800 is not taxed. The £10,000 left outside earns £400, which is inside the £500 allowance. Check the rate and the withdrawal rules before moving money, because an ISA may pay less than a savings account and may limit how fast you can take cash out. Money meant for a tax bill is usually better kept easy to reach.

How do you report the interest?

After 5 April each year, your bank or building society tells HMRC how much interest it paid you in the previous tax year. If tax is due, HMRC sends a calculation by letter or through your Personal Tax Account. It usually breaks the interest down by account.

GOV.UK also says you may need to send a Self Assessment return if you have untaxed income such as savings interest. As a sole trader you probably file one already, so add the interest to it and check the figure against your bank's statement. For a joint account, HMRC splits the interest equally between the holders.

A limited company follows different rules. It pays Corporation Tax on its interest and has no Personal Savings Allowance, which our business savings accounts article explains.

What should a sole trader do this month?

1. Add up the interest from every account you hold. Use last year's statements for personal and business accounts.
2. Work out your income tax band. Add your profit and other income, then check which allowance you get.
3. Check whether you qualify for the starting rate. It needs other income below £17,570.
4. Look at a cash ISA if your interest is above your allowance. Compare the ISA rate with your savings account rate.
5. Keep the tax bill money easy to reach. Our cash reserve article shows how to size it.

Savings interest is also tied to what the Bank of England does, which our Bank Rate article explains. You can see how similar businesses near you are doing with our free competitor report. The Save tax page covers other ways to keep more of what you earn. If your profit is growing, remember that a higher band cuts your allowance, so the Grow profit page is worth a look too. The IQ Money calculators let you put your own figures into the sums.

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