Personal Savings Allowance

The Personal Savings Allowance (PSA) is the amount of savings interest you can earn each tax year without paying Income Tax. It was introduced in 2016 to simplify the taxation of savings income. The amount you get depends on your Income Tax band. This guide explains how the allowance works, how savings interest is taxed, and how to optimise your savings using ISAs and other tax-efficient accounts.

How Much Is the Personal Savings Allowance

The PSA is £1,000 for basic rate taxpayers (those earning between £12,571 and £50,270), £500 for higher rate taxpayers (those earning between £50,271 and £125,140), and £0 for additional rate taxpayers (those earning over £125,140). Your tax band is determined by your total taxable income, including employment, self-employment, pension, rental income, savings, and dividends. The PSA applies per person, not per account, so you add up all the interest from all your savings accounts (including joint accounts — you are taxed on your share of the interest).

The Starting Rate for Savings

In addition to the PSA, there is the Starting Rate for Savings. This is a 0% tax rate on up to £5,000 of savings income, but it is only available if your total non-savings income (employment, self-employment, pension) is below £17,570. For every £1 of non-savings income above £12,570, the £5,000 starting rate band is reduced by £1. So if your non-savings income is £14,570, your starting rate for savings is £3,000. If your non-savings income is £17,570 or more, you get no starting rate for savings — but you may still have the PSA. The starting rate is applied before the PSA.

How Interest Is Taxed

Banks and building societies pay interest to your savings account without deducting tax (since the PSA was introduced). It is your responsibility to pay any tax due on interest that exceeds your allowances. If your total savings interest is within your PSA, you have nothing to report. If it exceeds your PSA, the excess is taxed at your marginal rate: 20% for basic rate, 40% for higher rate, and 45% for additional rate. You report savings interest on your Self Assessment tax return if required. If you are employed and your savings interest exceeds £10,000, HMRC may adjust your tax code to collect the tax owed. For most people, savings interest stays within the PSA and no action is needed.

ISAs vs Taxable Savings

For savers with significant interest income, ISAs (Individual Savings Accounts) offer a better alternative. Interest earned within an ISA is completely tax free and does not count towards your PSA. The annual ISA subscription limit for 2026/27 is £20,000. A Cash ISA works like a standard savings account but without tax on the interest. For long-term savers, a Stocks and Shares ISA offers tax-free growth and dividends. If you are a higher or additional rate taxpayer and you have already used your PSA, you should maximise your ISA allowance before using taxable savings accounts.

Reporting Interest on Self Assessment

If you file a Self Assessment return, you must declare any savings interest received, even if it is within your PSA. The HMRC online system automatically applies the PSA and starting rate for savings to calculate your tax. If your interest is within the allowance, no tax will be due. You should receive an annual statement from your bank showing the interest paid during the tax year. Keep these statements as evidence. If you have multiple savings accounts, add up all the interest received across all accounts. Joint accounts: report 50% of the interest (or your agreed share).

Practical Example

David is a basic rate taxpayer earning £35,000 per year. He has £30,000 in a savings account earning 4% interest (£1,200 per year). His PSA is £1,000, so he pays tax on the £200 excess at 20% — a tax bill of £40. He could move £20,000 into a Cash ISA earning the same rate, giving him £800 of tax-free interest. The remaining £10,000 in taxable savings would earn £400, all within his PSA. David would pay no tax at all on his savings interest.

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