The Personal Savings Allowance Explained
The Personal Savings Allowance (PSA) is the amount of savings interest you can earn each tax year without paying income tax on it. It was introduced in April 2016 and the amounts have not changed since: £1,000 for basic rate taxpayers (income between £12,571 and £50,270); £500 for higher rate taxpayers (income between £50,271 and £125,140); £0 for additional rate taxpayers (income above £125,140). The PSA applies to interest from bank accounts, building society accounts, credit unions, peer-to-peer lending, and most bonds. It does not apply to interest earned inside an ISA, which is separately tax-free with no limit.
"The Personal Savings Allowance (PSA) is the amount of savings interest you can earn each tax year without paying income tax on it"
At What Point Do You Start Paying Tax?
With savings rates at 4–5% in 2025, it is easier than it has been in over a decade to breach the PSA. A basic rate taxpayer with £20,000 in a 5% account earns £1,000 in interest — exactly at the limit. Every pound above £20,000 at that rate generates taxable interest. A higher rate taxpayer with just £10,000 at 5% earns £500 in interest — at their limit. If you have significant savings across multiple accounts, add up all the interest you expect to receive in the tax year. Your bank will send you an annual interest statement (often in April) which HMRC also receives.
How HMRC Collects the Tax
For most PAYE employees and pensioners, HMRC does not send a tax bill for savings interest. Instead, it adjusts your tax code to collect the underpaid tax through reduced take-home pay or pension in the following tax year. This is why checking your tax code matters — if your savings are significant, your code should reflect a deduction for expected savings interest. Self-employed people and those who already file a Self Assessment return must declare all savings interest on their return, even if it is within the PSA. The PSA reduces the tax payable to zero but the interest must still be declared.
ISAs: The Complete Solution
Interest earned inside a Cash ISA is completely tax-free — it does not count toward your PSA and is never reported to HMRC as taxable income. This makes ISAs especially valuable for higher rate taxpayers with significant savings, for whom the PSA of £500 is quickly breached. In 2025/26 you can save up to £20,000 per year across all ISA types. If you have savings outside an ISA that are generating taxable interest, consider whether to move them into a Cash ISA at the start of the next tax year (you cannot transfer and benefit in the same tax year once over the limit). Existing ISA balances can be transferred to a better-rate ISA provider without losing the tax-free status.
"In 2025/26 you can save up to £20,000 per year across all ISA types"
Premium Bonds and Other Tax-Free Options
NS&I Premium Bonds are completely tax-free — prizes are not subject to income tax and do not count toward the PSA regardless of how much you win. The current prize fund rate is equivalent to approximately 4.4% tax-free. For a higher rate taxpayer, this is equivalent to a taxable rate of approximately 7.3% gross — making Premium Bonds highly competitive for this group. You can hold up to £50,000 in Premium Bonds. Other tax-free savings options include Help to Save accounts (for those on Universal Credit or Working Tax Credit) and NS&I savings certificates (when available).
Starter Rate for Savings
There is an additional allowance that many people overlook: the Starter Rate for Savings. If your non-savings income (employment, pension, rental income, etc.) is below £17,570, you may also benefit from a 0% Starter Rate on up to £5,000 of savings interest. This rate reduces by £1 for every £1 of non-savings income above the Personal Allowance of £12,570. So if your non-savings income is £14,570, your Starter Rate band is £5,000 minus £2,000 = £3,000 of additional tax-free savings interest. Combined with the PSA, a basic rate taxpayer with non-savings income of £14,000 could earn up to £4,000 in savings interest before paying any tax.
Joint Accounts and Savings Tax
Interest from a joint savings account is split equally between account holders for tax purposes, regardless of who deposited the money. Both partners can use their individual PSA against their half of the interest. A couple where one partner is a basic rate taxpayer and one is a higher rate taxpayer can maximise their tax-free savings interest by holding savings in the basic rate taxpayer's name, giving access to the larger £1,000 PSA. Alternatively, holding joint savings inside individual ISAs in each partner's name eliminates the tax question entirely.
"Both partners can use their individual PSA against their half of the interest"
HMRC is increasingly using data-sharing with banks to identify savers who have exceeded their Personal Savings Allowance without declaring the interest. Banks report interest paid to HMRC automatically. If your savings interest is above your PSA and HMRC has not adjusted your tax code, you may receive a bill — sometimes covering multiple years. The simplest way to avoid this entirely is to hold savings inside an ISA, where interest is never taxable and never reported to HMRC.
Finance Motion — General guidance only.
Not regulated financial advice.