The Personal Savings Allowance (PSA) lets UK savers earn interest from bank accounts, savings bonds, and other savings products without paying income tax — up to £1,000 per year for basic-rate taxpayers and £500 per year for higher-rate taxpayers. Additional-rate taxpayers (income over £125,140) receive no PSA. Introduced in April 2016, the PSA operates separately from your ISA allowance — you can use both simultaneously.
Quick answer: If you are a basic-rate taxpayer, the first £1,000 of savings interest you earn each year is tax-free under the PSA. Higher-rate taxpayers get £500 tax-free. Any interest above these limits is taxed at your marginal rate. ISA interest never counts against your PSA.
Personal Savings Allowance 2026/27
| Tax Rate Band | Annual Income (2026/27) | PSA Amount |
|---|---|---|
| Basic rate (20%) | Up to £50,270 | £1,000 |
| Higher rate (40%) | £50,271 – £125,140 | £500 |
| Additional rate (45%) | Above £125,140 | £0 |
The PSA amounts have not changed since 2016. However, rising interest rates since 2022 mean many more savers are now exceeding their PSA than in prior years.
What Types of Interest Count Against the PSA?
The PSA applies to most interest income from financial products in the UK:
Counts against PSA:
- Bank and building society savings accounts
- Cash ISA interest transferred to non-ISA accounts (no — ISA interest stays tax-free)
- Fixed-rate savings bonds and term deposits
- Peer-to-peer lending income (treated as interest)
- Credit union savings
- Current account interest
Does NOT count against PSA (always tax-free):
- ISA interest (Cash ISA, Stocks & Shares ISA, Lifetime ISA, Innovative Finance ISA)
- NS&I Premium Bond prizes
- NS&I Direct ISA interest
- Interest from government gilts in certain circumstances
- Interest from savings abroad (may be taxable differently)
Worked Example: PSA Usage at Different Income Levels
Sophie — basic-rate taxpayer, earns £35,000: She has £40,000 in a regular savings account paying 4.5% interest. Annual interest: £1,800.
- PSA: £1,000
- Taxable interest: £800
- Tax owed: £800 × 20% = £160
If Sophie moved £22,222 of that savings into a Cash ISA earning the same rate, the ISA portion generates £1,000 in tax-free interest, and the remaining savings generate £800 in interest that falls within her PSA. Result: £0 tax on savings interest.
David — higher-rate taxpayer, earns £65,000: He has £30,000 in a high-yield savings account at 5.0% interest. Annual interest: £1,500.
- PSA: £500
- Taxable interest: £1,000
- Tax owed: £1,000 × 40% = £400
David should use his annual ISA allowance (£20,000) to move savings into a Cash ISA and reduce taxable interest outside the ISA.
Starter Rate for Savings
There is an additional allowance called the Starter Rate for Savings — a 0% tax rate on up to £5,000 of savings interest — but only if your non-savings income (wages, pension) is low enough. The starter rate applies to any savings interest once your non-savings income falls below £17,570 (personal allowance £12,570 + £5,000 starter band).
This is particularly relevant for:
- Early retirees with low pension income
- Part-time workers with minimal employment income
If your non-savings income is below £12,570 (within the personal allowance), your full £5,000 starter rate is available, plus the £1,000 PSA — a total of £6,000 in potentially tax-free savings interest before the personal allowance is even used.
How HMRC Collects Tax on Savings Interest
Banks and building societies automatically report interest paid to HMRC each year. The CRA does not withhold tax on interest at source. HMRC collects any tax owed on savings through one of two routes:
- PAYE adjustment: If you are an employee or pensioner, HMRC adjusts your tax code to collect the extra tax through your monthly pay/pension.
- Self-assessment return: If you are self-employed or have complex affairs, you report savings interest on your self-assessment tax return.
You do not need to do anything if the bank reports correctly and your income is straightforward — HMRC should handle it automatically. However, it is good practice to check your tax code each April to confirm HMRC has the correct savings interest estimate.
PSA Strategy: Working Alongside ISAs
The most effective savings tax strategy for UK savers is to combine the PSA with ISA savings:
Priority order:
- Cash ISA (£20,000/year): Interest is always tax-free and does not count against your PSA
- Savings accounts up to your PSA: Use the £1,000/£500 tax-free allowance on top of ISA savings
- Premium Bonds: Prize winnings are tax-free and do not use the PSA (no guaranteed return, though)
For higher-rate taxpayers: With only a £500 PSA, prioritise the full ISA allowance before keeping large sums in ordinary savings accounts. A 5% savings rate on £10,000 outside an ISA generates £500 interest — exactly your PSA limit. Any more savings should be in an ISA.
Couples and the PSA
Each individual has their own PSA. Married couples and civil partners can split savings between them to double the tax-free interest:
| Combined Savings | Strategy | Tax-Free Interest |
|---|---|---|
| £40,000 at 4.5% | Both basic-rate: £1,000 PSA each | £2,000 combined tax-free |
| £40,000 at 4.5% | Both in ISAs | All £1,800 interest tax-free |
If one partner does not work or has minimal income, they may also benefit from the Starter Rate for Savings — potentially allowing up to £6,000 of tax-free savings interest per year before needing to use an ISA.
The PSA and High-Interest Rates (2024–2026 Context)
When the PSA was introduced in 2016, interest rates were at historic lows (Bank of England base rate near 0%). Savers needed very large deposits to exceed the £1,000 PSA threshold. With the BoE base rate peaking above 5% in 2023–2024, many savers found their savings interest exceeding the PSA for the first time. At 4.5%:
- A basic-rate taxpayer hits the £1,000 PSA limit with just £22,222 in savings
- A higher-rate taxpayer hits the £500 PSA limit with just £11,111 in savings
If you have more than these amounts in non-ISA savings, some of your interest is taxable. Review your savings allocation annually.
Related UK Saving and Investing Resources
- Cash ISA Guide 2026 — tax-free interest inside an ISA
- Lifetime ISA Guide 2026 — 25% government bonus for first-time buyers
- UK ISA Allowance 2026 — full annual ISA allowance details
- UK Savings Rates and Best Accounts (2026)
- UK Investing Hub — all ISA guides and investment calculators
The Personal Savings Allowance is a valuable but limited tax break. As interest rates remain elevated, it is worth reviewing whether your savings are optimally placed between ISAs (unlimited tax-free interest) and standard savings accounts (limited by the PSA) to avoid an unexpected tax bill from HMRC.
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