How the Personal Savings Allowance works
Quick answer: Basic-rate taxpayers can earn £1,000 of interest tax-free each year, higher-rate £500, and additional-rate £0 — all outside an ISA.
Basic-rate taxpayers can earn £1,000 of interest tax-free each year, higher-rate £500, and additional-rate £0 — all outside an ISA. The allowance has been frozen at these levels since 2016, while higher savings rates and frozen income-tax thresholds have pushed many more savers over it. Anything inside a Cash ISA or NS&I Premium Bonds is tax-free regardless of the PSA, which is why most savers use up their ISA allowance before relying on the PSA for the rest.
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Primary source: gov.uk/apply-tax-free-interest-on-savings
How much you can earn tax-free
The Personal Savings Allowance was introduced in April 2016 to make the first slice of cash interest tax-free for most people. The amount depends on your highest tax band: £1,000 for basic-rate, £500 for higher-rate, and nothing for additional-rate (45%) taxpayers.
There is also a separate Starting Rate for Savings worth up to £5,000 of tax-free interest if your non-savings income is below the Personal Allowance — useful for people in retirement or on very low earnings.
What counts as savings interest
Interest from bank and building society accounts, fixed-rate bonds, credit union accounts, government and corporate bonds, peer-to-peer lending, and most NS&I products counts as taxable savings interest.
Premium Bond prizes and ISA interest do not count and are always tax-free. Dividends are not savings interest — they have their own £500 dividend allowance.
How tax above the allowance is paid
You do not need to declare savings interest under the Personal Savings Allowance — banks report the figures to HMRC automatically. If you go over your allowance, HMRC normally collects the tax by adjusting your tax code the following year.
If your total taxable income is high enough that you file Self Assessment, you do need to enter the interest there.
Worked examples
Basic-rate saver: Sarah earns £35,000 and has £40,000 in a 5% one-year fixed-rate savings account. Interest of £2,000 — minus the £1,000 PSA — leaves £1,000 taxable at 20%, a £200 tax bill that HMRC collects through her tax code the following year.
Higher-rate saver: David earns £65,000 and has the same £40,000 at 5%. His PSA is £500, leaving £1,500 of interest taxable at 40% — a £600 tax bill. Sheltering the £40,000 in a Cash ISA over two years (£20,000 each tax year) would have removed the charge entirely.
Additional-rate saver: Priya earns £160,000. Her PSA is £0, so every penny of savings interest is taxable at 45%. For high earners, ISAs and gilts (where capital gains are tax-free) often matter more than for basic-rate taxpayers.
The Starting Rate for Savings — often missed
Separately from the PSA there is a £5,000 Starting Rate for Savings band, taxed at 0%. It is available to anyone whose non-savings income (salary, pension, rental) is below the £12,570 Personal Allowance — and it tapers away £-for-£ above the allowance until it disappears at £17,570 of non-savings income.
Combined with the £12,570 Personal Allowance and the £1,000 PSA, someone on a low non-savings income can earn up to £18,570 a year of savings interest tax-free. This matters in early retirement, on career breaks, and for partners of higher earners with most income in their name.
Common questions
- Does the Personal Savings Allowance apply to ISAs?
- No — interest inside an ISA is tax-free anyway and does not use up your PSA. Outside an ISA, the PSA is the first £1,000 (basic-rate) or £500 (higher-rate) of interest in the tax year.
- Is a Cash ISA still worth it?
- If your interest comfortably fits inside your PSA and the non-ISA savings rate is materially better, you may pay no tax either way. The case for a Cash ISA grows as your savings (and interest) grow, and for higher-rate or additional-rate taxpayers.
- What if I have joint savings?
- Interest from a joint account is split 50/50 for tax purposes by default. Each account holder's share counts against their own PSA.