Personal Savings Allowance Explained

With savings rates higher than they were a few years ago, more people are earning enough interest to bump into a tax charge. The personal savings allowance decides how much of that interest you keep tax-free.

The personal savings allowance lets basic-rate taxpayers earn £1,000 of savings interest a year tax-free, higher-rate taxpayers £500, and additional-rate taxpayers nothing. Interest above your allowance is taxed at your usual income tax rate.

In this insight, we explain how the allowance works, how savings interest is taxed, and an important tax rise on savings interest coming in April 2027.

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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.

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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.

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.

If you hold a lot of cash outside an ISA, it can be worth reviewing rates too. Comparison portals such as Raisin list savings accounts from a range of providers in one place.

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.

Making the Most of Your Allowances

A few practical points:

• Couples can each use their own PSA, so splitting savings between partners can double the tax-free interest a household earns.
• Moving savings that exceed your PSA into a cash ISA shelters the interest permanently.
• Fixed-rate bonds that pay all their interest in one tax year can tip you over the allowance in that year — check when interest is credited.

Frequently Asked Questions

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 where interest is always tax-free regardless of the PSA.

Do non-taxpayers get a bigger allowance?

People with low incomes may also benefit from the starting rate for savings, on top of the PSA, potentially earning more interest tax-free. Check GOV.UK for the detail.

Does the PSA cover dividends?

No. Dividends have their own separate dividend allowance and rates. The PSA applies only to interest.

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

Usually HMRC adjusts your tax code automatically, or you declare it through self assessment if you file a return.

This is general information, not personal tax advice. For your own figures, check GOV.UK or speak to a qualified adviser.