Personal Savings Allowance Explained

Basic-rate taxpayers can earn £1,000 of savings interest a year tax-free. Higher-rate taxpayers get £500, and additional-rate taxpayers get nothing. Interest above your allowance is taxed at your usual income tax rate.

Savings rates are higher than they were a few years ago, so more people are bumping into a tax charge for the first time — often without realising it, because HMRC usually collects it quietly through your tax code. There is also a second, much larger allowance that most people have never heard of, and a tax rise arriving in April 2027.

At a glance

Basic-rate allowance: £1,000
Higher-rate allowance: £500
Additional-rate allowance: £0
Starting rate for savings: up to £5,000 more
ISA interest: always tax-free
Savings tax rates rise: 6 April 2027

💰 Will I pay tax on my savings interest?

Your other income (salary, pension)

Savings interest this year

Tax-free interest£1,000

Tax to pay£100

£500 of your interest is taxable, at the basic rate. HMRC usually collects this by adjusting your tax code rather than sending a bill, so it comes out of your wages or pension.

What shelters your interest	Available	Used
Unused personal allowance	£0	£0
Starting rate for savings — income too high	£0	£0
Personal savings allowance	£1,000	£1,000

From 6 April 2027, tax rates on savings interest rise by 2 percentage points (basic 20% to 22%, higher 40% to 42%, additional 45% to 47%). On these figures that would take your bill from £100 to £110 — £10 more a year. The allowances themselves are not changing.

Rates and allowances for England, Wales and Northern Ireland. Scotland sets its own income tax bands, but savings interest is taxed at UK-wide rates, so the result here still applies — what differs is which band your other income falls into. Assumes the standard personal allowance and no other complications such as dividends, gift aid or salary sacrifice. Interest inside an ISA is ignored entirely, because it is tax-free and does not count towards any of these allowances. General information, not tax advice.

Key Takeaways

Your personal savings allowance depends on your income tax band: £1,000, £500 or £0.
Interest above the allowance is taxed at your marginal rate — 20%, 40% or 45%.
Interest earned inside an ISA doesn't count and is always tax-free, on top of the allowance.
From April 2027, the tax rates applied to savings interest are set to rise by 2 percentage points.

How the Personal Savings Allowance Works

The personal savings allowance (PSA) was introduced so most people pay no tax on their savings interest. How much you get depends on the highest rate of income tax you pay:

Basic-rate taxpayers (20%): £1,000 tax-free
Higher-rate taxpayers (40%): £500 tax-free
Additional-rate taxpayers (45%): £0 — no allowance

For reference, in the 2026/27 tax year the higher rate applies to income between £50,271 and £125,140, and the additional rate above £125,140. So a rise in income that pushes you into a new band can shrink your savings allowance at the same time.

The allowance covers interest from most sources, including bank and building society accounts, most fixed-rate bonds and term deposits, and some peer-to-peer lending.

How Savings Interest is Taxed

If your interest stays within your allowance, there's nothing to pay and usually nothing to report. Once you go over, the excess is taxed at your normal income tax rate.

For example, a basic-rate taxpayer who earns £1,300 of interest uses up the £1,000 allowance and pays 20% tax on the remaining £300 — a £60 tax charge. A higher-rate taxpayer earning the same £1,300 would use their £500 allowance and pay 40% on £800.

HMRC usually collects any tax due by adjusting your tax code, or through self assessment if you complete a tax return. You don't normally need to do anything to claim the allowance itself.

The £5,000 allowance almost nobody knows about

The personal savings allowance is not the only shelter. There is a second one, the starting rate for savings, worth up to £5,000 of tax-free interest on top of your PSA — and it goes almost entirely unclaimed because almost nobody has heard of it.

It is aimed at people whose income is mostly savings rather than wages, and it works like this:

You get up to £5,000 of savings interest at 0%.
Every £1 of other income above your personal allowance reduces it by £1.
So it disappears completely once your other income reaches £17,570.

An example. Someone with £16,000 of pension income has £3,430 of income above the personal allowance, so their starting rate is reduced from £5,000 to £1,570. Add the £1,000 personal savings allowance and they can earn £2,570 of interest before paying a penny.

Someone with no other income at all keeps the full £5,000, plus their personal allowance of £12,570, plus the £1,000 PSA — meaning they could receive £18,570 of savings interest entirely tax-free.

This matters most for early retirees living off savings before a pension starts, people taking a career break, and anyone with a low-earning partner. Which leads to the single most effective thing most couples can do here.

Interest Inside an ISA Doesn't Count

Interest earned inside a cash ISA is always tax-free and sits outside the personal savings allowance entirely. That's why ISAs become more valuable once your savings are large enough to generate more interest than your PSA covers.

Our guide to your ISA allowance explains how much you can shelter — £20,000 across ISAs in 2026/27.

The April 2027 Savings Tax Rise

An important change is coming. From April 2027, the tax rates applied to savings interest are set to rise by 2 percentage points:

Basic rate: 20% rising to 22%
Higher rate: 40% rising to 42%
Additional rate: 45% rising to 47%

The personal savings allowance amounts (£1,000 / £500 / £0) are not changing under this measure, but any interest above your allowance will be taxed a little more heavily than it is today. This makes tax-free ISA savings, and using your full allowance efficiently, more attractive for people with significant cash holdings. If you are choosing where to put the money, cash ISA versus stocks and shares is the next decision.

Making the Most of Your Allowances

A few practical points:

Move savings to the lower earner. Couples each get their own allowances, so a household can double its tax-free interest simply by holding the money in the right name. If one partner earns under £17,570 the starting rate applies too, which can shelter thousands more. Transfers between spouses and civil partners are free of tax, so there is no cost to doing it.
Moving savings that exceed your PSA into a cash ISA shelters the interest permanently.
Watch when interest is credited. A fixed-rate bond that pays all its interest at maturity can land several years of interest in one tax year and tip you over the allowance, when the same money spread across years would have been tax-free.
Check your tax code. If HMRC has estimated your interest, it may be collecting too much or too little. Our guide to tax codes explains how to read yours and get it corrected.
Premium Bonds prizes are not interest. They are tax-free and do not touch your allowance at all, which can make them worth a look once your other savings are already using it up.

Frequently asked questions

How much savings interest can I earn tax-free?

At least £1,000 if you are a basic-rate taxpayer, or £500 at the higher rate. Additional-rate taxpayers get no personal savings allowance. On top of that, the starting rate for savings can add up to £5,000 if your other income is below £17,570, and any unused personal allowance can shelter interest too.

Is the personal savings allowance the same as the ISA allowance?

No. The PSA is tax-free interest on ordinary savings accounts. The ISA allowance is a separate £20,000 wrapper, and interest inside an ISA is tax-free regardless of your PSA — it does not use any of it up.

What is the starting rate for savings?

An extra allowance of up to £5,000 of tax-free savings interest for people with low other income. It reduces by £1 for every £1 you earn above your personal allowance, so it is gone once other income reaches £17,570. It sits on top of the personal savings allowance rather than replacing it.

Does the personal savings allowance cover dividends?

No. Dividends have their own separate allowance and their own tax rates. The PSA applies only to interest — from savings accounts, bonds, and some peer-to-peer lending.

How do I pay tax if I go over my allowance?

Usually you do not have to do anything. Banks report interest to HMRC, which normally collects any tax due by adjusting your tax code, so it comes out of your wages or pension. If you complete a self assessment return, you declare it there instead.

Are savings taxes going up?

Yes, from 6 April 2027. Rates on savings interest rise by two percentage points — basic from 20% to 22%, higher from 40% to 42%, additional from 45% to 47%. The allowances themselves are unchanged, so only interest above your allowance is affected.

Does a joint account split the interest?

Yes. Interest on a joint account is normally treated as split equally between the holders, so each person uses their own allowance against their half. That is often less efficient than simply holding the savings in the lower earner's sole name.

General information, not tax advice. Figures are for England, Wales and Northern Ireland for the current tax year; Scotland sets its own income tax bands, though savings interest is taxed at UK-wide rates. For your own position check GOV.UK or speak to a qualified adviser.