The Personal Savings Allowance (PSA) lets you earn a certain amount of savings interest tax-free each year. Understanding how it works — alongside ISAs and the starting rate for savings — helps you keep more of your money.
Personal Savings Allowance by Tax Band
| Tax band | Income range (2026/27) | PSA | Tax rate on interest above PSA |
|---|---|---|---|
| Basic rate | £12,571 – £50,270 | £1,000 | 20% |
| Higher rate | £50,271 – £125,140 | £500 | 40% |
| Additional rate | Over £125,140 | £0 | 45% |
| Non-taxpayer | Up to £12,570 | N/A — see starting rate below | 0% |
The Starting Rate for Savings
If your total non-savings income (wages, pension, etc.) is below £17,570, you may qualify for the starting rate for savings:
| Detail | Amount |
|---|---|
| Starting rate band | Up to £5,000 of savings interest at 0% |
| How it works | The £5,000 band is reduced by every £1 of non-savings income above £12,570 |
| Example: income of £12,570 | Full £5,000 starting rate + £1,000 PSA = £6,000 tax-free savings interest |
| Example: income of £15,570 | Starting rate reduced to £2,000 + £1,000 PSA = £3,000 tax-free |
| Example: income of £17,570+ | Starting rate is £0 — PSA only applies |
This is particularly relevant for part-time workers, retirees on small pensions, and students.
How Much Can You Save Before Paying Tax?
These examples assume a 5% savings interest rate (outside ISAs):
| Tax band | PSA | Tax-free savings threshold | Calculation |
|---|---|---|---|
| Non-taxpayer (income £12,570) | £1,000 + £5,000 starting rate | £120,000 | £6,000 ÷ 5% |
| Basic rate | £1,000 | £20,000 | £1,000 ÷ 5% |
| Higher rate | £500 | £10,000 | £500 ÷ 5% |
| Additional rate | £0 | £0 — all interest taxed | N/A |
At lower interest rates, the thresholds are higher. At 3% interest, a basic rate taxpayer could hold £33,333 before paying tax.
PSA vs ISAs — How They Work Together
| Feature | Personal Savings Allowance | ISA |
|---|---|---|
| Tax-free interest | Up to £1,000 (basic) / £500 (higher) | Unlimited |
| Annual limit | No limit on savings amount | £20,000 per tax year contribution |
| Interest counts towards PSA? | Yes | No |
| Protects future interest? | Only current year | Permanently tax-free |
| Available to additional rate? | No (£0 PSA) | Yes |
Strategy: Use Both
- Max out ISAs first — interest earned here never counts towards your PSA
- Use your PSA for non-ISA savings — keep savings accounts for money that exceeds your ISA allowance
- Consider your tax band — if you’re near the higher rate threshold, a pay rise or bonus could halve your PSA
How Tax on Savings Interest Is Collected
| Situation | How tax is collected |
|---|---|
| Employed (PAYE) | HMRC adjusts your tax code — tax is collected through your wages |
| Self-assessment | You report savings interest on your tax return |
| Pensioner (PAYE pension) | HMRC adjusts your pension tax code |
| Non-taxpayer | No tax to pay — but you may need to claim back overpaid tax if bank deducted it |
Banks and building societies report your interest to HMRC automatically. You don’t need to do anything unless you’re on self-assessment.
What If HMRC Gets It Wrong?
If your tax code has been adjusted for savings interest and the amount seems wrong:
- Check your interest across all accounts using your bank statements
- Log in to your HMRC personal tax account to see the estimate
- Call HMRC or update your details online to correct the figure
- If you’ve overpaid, you can claim a refund through your personal tax account or by writing to HMRC
What Counts as Savings Interest?
| Counts towards PSA | Doesn’t count towards PSA |
|---|---|
| Bank and building society interest | ISA interest |
| Credit union interest | Premium Bonds prizes (tax-free) |
| Peer-to-peer lending interest | Dividends (separate allowance) |
| Government bond (gilt) interest | Capital gains |
| Corporate bond interest if received gross | |
| NS&I Income Bonds, Investment Account | NS&I Premium Bonds, Direct Saver (some products are tax-free) |
Tips to Minimise Tax on Savings
- Use your full ISA allowance (£20,000/year) — all interest is permanently tax-free
- Split savings between partners — if one is a non-taxpayer or basic rate and the other is higher rate, holding savings in the lower earner’s name maximises tax-free interest
- Use Premium Bonds — prizes are tax-free and don’t count towards your PSA
- Consider NS&I products — some are tax-free (e.g. Premium Bonds, some older fixed-rate certificates)
- Track your interest — know when you’re approaching your PSA limit so you can move money into ISAs before the next tax year
- Check your tax code — make sure HMRC’s estimate of your interest is accurate
Quick Comparison: PSA vs ISA vs Premium Bonds
| Feature | PSA | Cash ISA | Premium Bonds |
|---|---|---|---|
| Tax-free | Up to £1,000/£500 per year | All interest | All prizes |
| Contribution limit | None | £20,000/year | £50,000 total |
| Guaranteed return | Yes (at your savings rate) | Yes (at ISA rate) | No (prize draw) |
| Access | Depends on account | Easy access or fixed | Easy access |
| Best for | Non-ISA savings below threshold | Long-term tax-free saving | Tax-free with some risk |
You Might Also Find Useful
- Income Tax Guide UK 2025/26 — Bands, Rates & How It Works
- Capital Gains Tax Guide UK — Rates, Allowances & How to Reduce It