How Much Interest Can £1 Million Earn per Year in the UK?
A guide to how much interest and income £1 million can generate in the UK. We explore returns from savings accounts, ISAs, bonds, property, and dividends.
Having £1 million is a significant financial milestone, but what does it actually mean in terms of generating a liveable income? Whether you’ve acquired it through a lifetime of saving, an inheritance, or a lottery win, understanding how much interest or income this sum can produce is the key to planning your financial future.
The answer isn't a single number; it depends entirely on where you put the money and how much risk you're willing to take. At Plouta, we're dedicated to providing you with the clarity to make smart financial decisions. This guide will explore the potential annual income you could earn from £1 million in the UK today, from the safety of a savings account to the higher potential returns of the stock market, while also considering the crucial impact of tax and inflation.
What You Will Learn in This Guide ⤵
The Key Factors: Understanding how risk, tax, and inflation affect your real returns.
Scenario 1: The Safety of Cash Savings: What you could earn from top savings accounts.
Scenario 2: Lower-Risk Investments: Looking at the potential income from bonds.
Scenario 3: Investing for Growth & Income: Exploring dividend income from the stock market.
Scenario 4: Property Investment: The potential returns from a buy-to-let portfolio.
A Summary Comparison Table: An at-a-glance view of your options.
Before We Start: Risk, Tax, and Inflation
It's crucial to understand three factors that will impact your earnings:
The Risk/Return Trade-Off: The fundamental rule of finance. To get higher potential returns, you must accept a higher level of risk to your capital. The safest options will always offer the lowest returns.
Tax: Once the money is yours, any income it generates (interest, dividends, rent) is potentially taxable. We'll show the gross income, but your net return will be lower.
Inflation: The silent force that erodes the purchasing power of your money. If your return is 4% but inflation is 3%, your "real" return is only 1%. Your goal should always be to achieve a return that beats inflation over the long term.
Scenario 1: The Safety of Cash Savings
Placing your £1 million in savings accounts is the lowest-risk option. Your capital is not at risk from the market, and deposits with UK-regulated banks are protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person, per institution. To fully protect £1 million, you would need to spread it across at least 12 different banking institutions.
Typical Interest Rates (as of July 2025):
Easy-Access Savings Accounts: The best rates are around 4.0% - 4.5% AER.
Fixed-Rate Savings Bonds (1-2 years): You can often secure slightly better rates, typically 4.5% - 4.7% AER, by locking your money away.
Calculation:
£1,000,000 at 4.5% AER = £45,000 per year.
The Tax Impact: This is the major drawback. As a higher-rate taxpayer, you have a Personal Savings Allowance (PSA) of just £500.
Taxable Interest: £45,000 - £500 = £44,500
Tax at 40%: £44,500 x 40% = £17,800
Net Annual Income (after tax): ~£27,200
Verdict: While safe, leaving a large sum in cash savings is very tax-inefficient and may struggle to beat inflation over the long term, meaning your wealth could be losing real-terms value.
Scenario 2: Lower-Risk Investments (Government Bonds)
Government bonds, or "gilts" in the UK, are essentially loans you make to the government in return for a fixed interest payment (a "coupon"). They are considered very low-risk as the chance of the UK government defaulting is extremely low.
Typical Yields (as of July 2025): The yield on a 10-year UK government gilt is a key benchmark. Let's assume a yield of around 4.0%.
Calculation:
£1,000,000 at 4.0% yield = £40,000 per year.
The Tax Impact: The income from gilts is taxable as savings interest, just like cash. The tax calculation would be very similar to the savings account scenario, resulting in a net income of around £24,200 (after 40% tax on £39,500 of the income).
Verdict: Very safe, but offers little advantage over cash from an income and tax perspective for a basic portfolio. It's a key part of a diversified portfolio but not typically used as a sole income source for a large lump sum in this way.
Scenario 3: Investing for Income (Stock Market Dividends)
A popular strategy for generating a higher, inflation-beating income is to invest in a portfolio of established, dividend-paying companies.
Typical Yields (as of July 2025): The dividend yield of the FTSE 100 (the UK's 100 largest companies) is a common benchmark. Historically, this has averaged around 3.5% - 4.0%. A well-managed income fund might aim for a slightly higher yield. Let's use 4.0% as a realistic target.
Calculation:
£1,000,000 at a 4.0% dividend yield = £40,000 per year.
The Tax Impact: Dividend income is taxed differently from interest. You have a Dividend Allowance (currently £500 for 2025/26), and the tax rates are lower than income tax rates.
Taxable Dividends: £40,000 - £500 = £39,500
Tax at 33.75% (for a higher-rate taxpayer): £39,500 x 33.75% = £13,331
Net Annual Income (after tax): ~£26,669
Important Note on Risk: While the income is attractive, your capital is at risk. The value of the £1 million invested will fluctuate with the stock market and could fall significantly. However, you also have the potential for capital growth over the long term, which you don't get with cash.
Verdict: This offers a higher potential total return (income + growth) and is more tax-efficient than cash interest, but it comes with significant investment risk. This is the cornerstone of most long-term retirement income strategies, typically managed within an ISA or SIPP.
Scenario 4: Property Investment (Buy-to-Let)
Another popular option is to use the £1 million to buy a portfolio of buy-to-let properties to generate rental income.
Typical Yields (as of July 2025): The gross rental yield (annual rent divided by property value) varies hugely by location. A UK average might be around 5.0% - 6.0%. After costs (maintenance, voids, agent fees), the net yield is often closer to 3.0% - 4.0%. Let's use a net yield of 3.5%.
Calculation:
£1,000,000 at a 3.5% net yield = £35,000 per year.
The Tax Impact: Rental profit is taxed as income, and the tax treatment is less favourable than it used to be.
Tax at 40% (for a higher-rate taxpayer): £35,000 x 40% = £14,000
Net Annual Income (after tax): ~£21,000 (This is a simplified example; tax on property is complex).
Important Note on Risk & Effort: Like stocks, property values can fall. Property is also highly "illiquid" (you can't sell it quickly) and requires significant hands-on management or costly letting agent fees. You also need to factor in initial costs like Stamp Duty.
Verdict: Can provide a solid income, but it is tax-inefficient and requires significant effort. It's a business, not a passive investment.
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Conclusion: It's All About Your Goals
As the scenarios show, £1 million can generate a substantial annual income, ranging from a relatively secure £40,000-£45,000 from cash or bonds, to a potentially higher total return from riskier assets like stocks and property.
For most people looking to generate a sustainable income, a well-diversified investment portfolio, containing a mix of shares and bonds and held within tax-efficient wrappers like ISAs and Pensions, is the most effective long-term strategy. This approach balances the need for income and growth with the management of risk.
Simply leaving £1 million in a single savings account is the safest option for your capital, but the combination of tax and inflation means it may be the riskiest option for your long-term financial wellbeing.
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Disclaimer: This article provides general information and illustrative scenarios based on data available as of July 2025. It is for informational and educational purposes only and does not constitute financial advice. Interest rates, dividend yields, and property yields can and will change. The value of investments can go down as well as up, and you may get back less than you invested. Tax treatment depends on individual circumstances and may be subject to change. Always seek professional, regulated financial advice tailored to your specific situation before making any investment decisions.