The first £1,000 of interest is free in Britain and taxable in America

Figures relate to tax year 2025-26 (UK) · 2025 (US)

For years nobody thought about interest because there barely was any. Higher rates changed that, and ordinary savers suddenly have real income from cash sitting in an account.

Britain hands most people an allowance before any tax applies, so plenty of savers pay nothing at all. America gives no such allowance. Savings interest is taxable from the first penny on an American return.

Key takeaways

• Basic rate taxpayers get £1,000 of interest free of UK tax each year.
• Higher rate taxpayers get £500, and additional rate taxpayers get nothing.
• America taxes savings interest as ordinary income from the first pound.
• An ISA is free of UK tax and fully visible to the IRS.
• No UK tax paid means no foreign tax credit to offset the US charge.
• The accounts themselves may need separate annual reporting.

What is the personal savings allowance?

It is an amount of savings interest you can receive each year without British tax. According to HMRC guidance, basic rate taxpayers get £1,000, higher rate taxpayers get £500, and additional rate taxpayers get nothing at all.

Banks pay interest gross, so nothing comes off at source.

Most savers never see a tax bill on interest as a result.

Is there anything else available?

A starting rate for savings aimed at people with low earned income can shelter a further slice of savings interest. It tapers away as other income rises, so most working people never reach it.

Retired savers and people between jobs benefit most from it.

Check your other income first, since the starting rate tapers quickly.

The ISA allowance sits alongside both as a separate route.

How does America treat the same interest?

America taxes savings interest as ordinary income at your marginal rate, from the first pound. There is no allowance, no starting rate and no equivalent of an ISA. The account wrapper means nothing across the Atlantic.

Savings interest from any country goes on the return in the same place.

So a saver paying no British tax can still face an American charge.

A worked example

The figures below are illustrative and use round numbers to show the mechanics.

Mark is American, lives in Cardiff and is a basic rate taxpayer. He holds £40,000 in a savings account paying 4%, giving him £1,600 of interest in the year.

Britain taxes £600 of that, because his allowance covers the first £1,000. He pays a modest amount of British tax.

America taxes the full £1,600, roughly $2,000, at his marginal rate. He can credit the British tax on the £600 but nothing against the rest.

The two systems compared

What about an ISA?

Cash in an ISA earns savings interest free of British tax, and America ignores the wrapper completely. The interest is taxable there exactly as if the account were an ordinary one.

A cash ISA at least avoids the fund problems a stocks version brings.

Our guide to the ISA and PFIC problem explains why that matters.

Do Premium Bonds count?

Prizes are free of British tax and America treats them as income, which makes them one of the clearest mismatches in the system. Winners often have no idea they are reportable.

Our guide to Premium Bonds and US tax covers them in detail.

Download the prize history from the account rather than relying on memory.

Keep a record of each prize and the month it arrived.

How do you convert the figures?

You report savings interest in dollars using a reasonable and consistent method. Most people take an annual average rate for a stream of small monthly amounts, which is accepted practice and much simpler to maintain.

A single large payment is better converted on its own date.

Whichever you choose, apply it the same way every year.

What about the tax year mismatch?

Britain runs to 5 April and America to 31 December, so the savings interest on each return covers a different twelve months. Banks issue certificates on the British year, which rarely match what the American return needs.

Monthly statements let you rebuild the calendar year figure.

Ask the bank for a full year of statements rather than a summary.

How to report it

1. List every account that paid you interest during the calendar year.
2. Include ISAs, which Britain exempts and America does not.
3. Add Premium Bond prizes and any other savings products.
4. Convert each amount to dollars on a consistent basis.
5. Report the total as interest income on your American return.
6. Claim a credit only for British tax actually paid on it.
7. Check whether the account balances trigger separate reporting.

Do the accounts need reporting separately?

Often yes, and this catches more people than the tax does. Foreign accounts whose combined balances pass a threshold at any point in the year need an annual report, whatever interest they paid.

The test looks at peak balances rather than closing ones.

Our guide to FBAR deadlines and penalties covers the mechanics.

Does a joint account complicate it?

It splits the savings interest according to who owns the money, which is usually half each for a married couple. An American married to a British spouse reports their own share rather than the whole amount.

The account still appears in full on the separate account reporting.

Write the split down once and reuse it each year.

Keep a note of who funded it if the split is not even.

What about a fixed term bond?

Where interest is credited annually you report it annually, even if you cannot access the money yet. A bond paying everything at maturity is generally reported when it becomes available to you.

The two countries can time that differently.

Three year bonds crediting annually produce three years of reporting, not one.

Ask the provider when interest is actually credited rather than paid.

Does the bank tell HMRC or the IRS?

Both, in different ways. British banks report interest to HMRC automatically each year, and under international exchange agreements they also report accounts held by Americans onward to the IRS without being asked.

So the information arrives whether you report it or not.

Our guide to the FATCA letter from your UK bank explains those requests.

What if you are not a taxpayer in Britain?

Then no British tax arises on the interest at all, and nothing is available to credit against the American charge. Somebody living on modest income can pay more American tax on interest than British tax.

That outcome surprises people every year.

Pensioners living mainly on the state pension meet this most often.

It is the same pattern as every tax-free British relief.

Does it affect your estimated payments?

It can where the amounts are meaningful, because interest arrives without any American withholding. A large balance earning well can produce enough tax to trigger an underpayment charge on its own.

Our guide to estimated tax payments from the UK covers the dates.

A single quarterly payment usually prevents it.

What records should you keep?

Monthly or quarterly statements for every account, the annual interest certificate from each bank, and a note of the conversion method you used. That set rebuilds either tax year on demand.

Keep the peak balance for each account too.

The account reporting needs it and banks rarely volunteer it.

Should you move cash into an ISA anyway?

For the British side, usually yes, because the exemption is real and permanent there. For the American side it achieves nothing at all, so the decision rests entirely on your British position.

Stick to cash rather than stocks inside the wrapper.

A stocks ISA brings fund problems that dwarf the interest question.

What about interest on a foreign currency account?

The interest is reportable in the ordinary way, but movements in the currency itself can produce a separate gain or loss when you eventually convert or spend the balance you are holding.

Small personal amounts usually fall below any threshold.

Larger balances deserve a proper look at the currency position.

Does it interact with the earnings exclusion?

Not directly, because the exclusion covers earned income only and savings interest is never earned income. Claiming the exclusion on your salary therefore leaves the interest fully exposed to American tax.

That often surprises people relying on the exclusion.

Our guide to Form 2555 and the exclusion sets out what it covers.

How much tax are we talking about?

Usually modest sums, which is why the reporting matters more than the tax. A few thousand pounds of interest produces a bill measured in hundreds, while a missed account report can cost thousands.

Keep the proportion in mind when deciding where to spend effort.

The balance between the two is what makes this area deceptively risky.

Get the reporting right and the tax follows easily.

What if an account is in your child name?

An American child is a taxpayer from birth, so savings interest in their name belongs on their own position rather than on yours. Small amounts usually fall below any filing threshold for them.

Our guide to Junior ISAs and US children covers that ground.

Their accounts can still count towards family reporting thresholds.

Does a notice account change anything?

No. Whether you can reach the money quickly makes no difference to when the interest is taxed, because what matters is the date the bank actually credits it to your account.

Check the credit date rather than the access terms.

Providers state it clearly in the product summary.

Does it change how you choose an account?

It can. Where the British exemption covers you anyway, the headline rate is all that matters and the American charge applies either way. Comparing products on rate alone remains sensible.

Only the wrapper decision really differs for an American.

And even then the British benefit is the one worth having.

Keep the number of accounts manageable, since each one adds reporting.

Mistakes and penalties we see with savings interest

The first is leaving ISA savings interest off the American return because Britain exempts it.

The second is claiming a credit for the whole amount when British tax only applied to part.

The third is using the bank certificate figure, which covers the wrong twelve months.

The fourth is forgetting the account reporting once balances grow. That is where the penalties live.

How US UK Tax Accountants helps

We rebuild the calendar year figures from your statements, separating the savings interest that carried British tax from the part that did not, and claim the credit only where it is genuinely available. Then we check the account reporting thresholds.

Where earlier years missed ISA interest, we look at whether an amendment helps. Our US federal return service covers the filing.

If your cash has started earning properly again, get in touch. The tax is usually small and the reporting is where the risk sits.

Last reviewed 3 October 2026. This article is general information and not personal tax advice. Every position turns on its own facts, so take advice on yours before filing.