£18,570 Tax-Free: What Savings Allowances Mean for Sole Traders

Tax Queen

Tax Expert @ Pie

5 min read

What You Need to Know

No tax rules have changed here. This is a reminder of how three existing allowances work together. If your other income is low, you could receive up to £18,570 in a tax year, including savings interest, without paying any Income Tax.

If you're a sole trader, freelancer or landlord, your business or rental profit counts as "other income". The more profit you make above £12,570, the smaller your tax-free savings band becomes. So it's worth checking how much interest you earned before you fill in your return.

If you file a Self Assessment return, you report your taxable savings interest on it and HMRC works out which allowances apply. The figures below are for the current 2026-27 tax year, which runs from 6 April 2026 to 5 April 2027. The same amounts applied in 2025-26.

How the Three Allowances Stack Up

GOV.UK lists three allowances that can cover interest on your savings. You get each one fresh every tax year, and how much of each you can use depends on your other income.

The Personal Allowance

Your Personal Allowance is the amount of income you can have each year before you pay any Income Tax. It's £12,570 for 2026-27, the same figure that has applied since the 2021-22 tax year. The source reports that the freeze is set to continue until 2031. [Editor Note: Unverified figure - check against HMRC guidance]

If your wages, pension, profits or other income don't use all of it, HMRC applies the rest to your savings interest.

The Starting Rate for Savings

The starting rate for savings is a 0% tax band that can cover up to £5,000 of interest. You only qualify if your other taxable income, not counting savings interest or dividends, is less than £17,570.

Every £1 of other income above your Personal Allowance cuts this band by £1. In HMRC's own example, someone earning £16,000 in wages has £3,430 above their Personal Allowance. That leaves £1,570 of starting rate, so their £200 of interest is tax-free.

The Personal Savings Allowance

On top of that, the Personal Savings Allowance lets you earn some interest tax-free depending on your tax band. It's £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and £0 for additional rate taxpayers. Our guide to the Personal Savings Allowance explains how it works in more detail.

Add the three together and you get £12,570 plus £5,000 plus £1,000, which makes £18,570. Someone with £20,000 of interest and no other income would pay 20% on the £1,430 above that, which gives a tax bill of £286.

What This Means If You're Self-Employed

The full £18,570 mainly helps people with little or no other income. Most self-employed people will get less, because trading profit uses up the Personal Allowance first and then starts eating into the starting rate.

What counts is your taxable profit, not your turnover. Profit is what's left after you take off allowable expenses (the business costs HMRC lets you deduct from your income). Claiming every allowable expense you're entitled to lowers your profit, and that can leave more of your starting rate free for interest.

Your tax band also decides how much Personal Savings Allowance you get, and that band is worked out with your interest added to your other income. If you're not sure where your total lands, this simple guide to how UK Income Tax bands work walks through the basics.

A Worked Example for a Sole Trader

Say your sole trader profit for 2026-27 is £15,000 and you earn £3,000 of savings interest. Your Personal Allowance covers the first £12,570 of profit. The remaining £2,430 cuts your starting rate for savings from £5,000 to £2,570.

The first £2,570 of your interest is taxed at 0%. The other £430 falls within your £1,000 Personal Savings Allowance, so you pay no tax on your interest at all. You would still pay Income Tax on the £2,430 of profit above your Personal Allowance, plus any National Insurance due on your profits.

If your profit had been £17,570 or more, you wouldn't get any starting rate. Only the Personal Savings Allowance would shelter your interest.

Reporting Savings Interest on Your Return

After 5 April each year, banks and building societies tell HMRC how much interest they paid you. If you file a Self Assessment return, you should still include your taxable UK interest on it so your tax calculation is complete.

Add up the interest from all your accounts, because HMRC adds them together too. Interest on joint accounts is split equally between the holders unless you tell HMRC it should be split differently. Interest from ISAs usually isn't taxable.

Your 2025-26 online return, and any tax you owe, are due by 31 January 2027. HMRC's reminder to file by 31 January covers what happens if you leave it too late. If you think you've paid too much tax on savings interest in the past, GOV.UK explains how to claim it back.

Keep Your Profit and Interest Figures Together

How much of these allowances you can use depends on your profit, so it helps to keep your business income, expenses and savings interest in one place all year. Now is a good time to check your bank statements or annual interest summaries for 2025-26, well before the January rush.

Pie Tax is self-assessment software for sole traders, landlords and freelancers. It pulls in your income and sorts your allowable expenses, so you can see your real profit figure, add your savings interest and file your return to HMRC with confidence.

When you're ready to pull your figures together and see how your profit and interest fit these allowances, you can get started today for free.