If you earn more in interest than your Personal Savings Allowance, you’ll pay any tax you owe in one of two ways:
If you’re employed: the extra tax will be taken by adjusting your Pay As You Earn (PAYE) tax codeIf you’re self employed: you’ll have to declare the savings interest on your self-assessment tax return.
Banks and building societies should give HM Revenue and Customs the information they need about how much savings interest someone receives.
Bear in mind that there are other allowances for earning interest before you have to pay tax on it, namely
your Personal Allowance (not the same as the Personal Savings Allowance)the starting rate for savings
Your Personal Allowance is the amount of money you can earn each tax year without paying tax. This tax year (2021/22) the Personal Allowance is £12,570. If you haven’t used this up on your wages, pension or other income, you can use this Allowance to earn interest tax-free.
The starting rate for savings will only apply to you if your income (such as your wages and pension) is less than £17,570 a year. If it is lower than this, you may also get up to a maximum £5,000 of interest and not have to pay tax on it (your starting rate for savings). Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.