How Does the Personal Savings Allowance Work UK?

The UK Personal Savings Allowance (PSA) is a tax-free amount of interest you can earn from non-ISA savings each tax year. It’s £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and £0 for additional-rate taxpayers in 2026/27. Interest above the PSA is taxed at your marginal income tax rate. The PSA only applies to interest from non-ISA accounts — ISA interest is separately tax-free and doesn’t use the PSA. Banks no longer deduct tax at source; the tax is collected via your tax code (PAYE) or Self Assessment.

This is the framework for 2026/27.

The amounts

For 2026/27:

Tax band	PSA
Basic rate (20%)	£1,000
Higher rate (40%)	£500
Additional rate (45%)	£0

These amounts haven’t changed since the PSA was introduced in 2016. They’ve been frozen, so the real value has eroded — especially with higher interest rates since 2022/23.

What “interest” counts toward the PSA?

The PSA applies to interest from:

• Savings accounts (easy-access, fixed-rate, notice accounts).
• Current accounts that pay interest.
• Regular saver accounts.
• Cash deposits in investment platforms (uninvested cash).
• Peer-to-peer lending (outside an Innovative Finance ISA).
• Government bonds (gilts) — coupon interest.
• Corporate bonds — coupon interest.
• Some NS&I products — Income Bonds, Direct Saver, etc. (but NOT Premium Bonds — prizes are tax-free separately).

What’s NOT covered by PSA:

• ISA interest — separately tax-free under ISA rules.
• Dividends — use the £500 Dividend Allowance.
• Capital gains — use the £3,000 CGT annual exemption.
• Pension interest — tax-free inside the pension wrapper.

How does HMRC collect tax above the PSA?

Banks don’t deduct tax at source on savings interest (this changed in 2016).

HMRC collects tax via:

• PAYE tax code adjustment: HMRC estimates your interest, adjusts your tax code, collects the tax through your salary.
• Self Assessment: if you’re registered, you report interest on your return.

For most basic-rate taxpayers with modest interest above the PSA:

• Banks report interest paid to HMRC annually.
• HMRC adjusts the next year’s tax code to collect the tax.
• You don’t need to do anything actively.

For higher-rate taxpayers or those with complex tax situations:

• Self Assessment may be required.
• Report interest in the relevant year’s return.

The PSA in practice — when it matters

The PSA only matters if you have significant non-ISA interest income:

For 2026/27 with current rates around 4.5%:

• Basic rate (£1,000 PSA): break-even at ~£22,000 of cash savings (at 4.5%).
• Higher rate (£500 PSA): break-even at ~£11,000 of cash savings.
• Additional rate (£0 PSA): every pound of interest is taxable.

Below the break-even, the PSA covers your interest and ISA wrapping isn’t strictly necessary for tax reasons (though ISA has other benefits — flexibility, longer-term protection).

Above the break-even, the ISA wrapper starts to be tax-saving on every additional pound of interest.

Tax on interest above the PSA

Interest above the PSA is added to your other taxable income and taxed at your marginal rate:

• Basic-rate band: 20%.
• Higher-rate band: 40%.
• Additional-rate band: 45%.

A worked example for basic-rate taxpayer:

• Salary: £40,000.
• Interest on savings: £1,800.
• PSA covers £1,000. Taxable interest: £800.
• Combined income: £40,800 (all in basic rate).
• Tax on interest: £800 × 20% = £160.

A worked example for higher-rate taxpayer:

• Salary: £80,000.
• Interest on savings: £1,800.
• PSA covers £500. Taxable interest: £1,300.
• Combined income: £81,300 (above £50,270, in higher rate).
• Tax on interest: £1,300 × 40% = £520.

What if my interest pushes me into a higher band?

If your interest is large enough to push your total income into the next band, the PSA changes accordingly:

• If your salary alone would keep you in basic rate, but interest pushes you into higher rate, your PSA drops from £1,000 to £500.
• The £500 reduction applies to the portion above the higher-rate threshold.

This is rare for most people but can happen with very large cash savings.

What if my salary is below the personal allowance?

If your salary is low (below £12,570) and you have savings interest, you can use:

• Personal allowance of £12,570 against income.
• Starting rate for savings of £5,000 (separate from PSA — for people with low non-savings income).
• PSA of £1,000.

For someone with £5,000 salary and £8,000 interest:

• Personal allowance covers first £12,570 of total income.
• Salary uses £5,000 of allowance.
• £7,570 of interest can be covered by remaining allowance + starting rate.
• Remaining £430 of interest uses part of PSA.

Most people with normal salaries have the personal allowance fully used by salary, so the starting rate for savings doesn’t apply.

Joint accounts and PSA

For joint accounts:

• Interest is split equally between the holders for tax purposes.
• Each holder uses their own PSA.

For a couple holding £30,000 jointly at 4.5% = £1,350 interest:

• £675 each.
• Both within their respective PSAs (assuming basic-rate taxpayers).
• No tax to pay.

ISA vs PSA — when does the ISA make sense?

The interaction between ISA and PSA is one of the most important tax-planning questions for savers:

ISA wins when:

• You’ve filled your PSA already (interest near or above £1,000/year for basic rate, £500 for higher rate).
• You expect your tax band to rise.
• You want flexibility (ISA money is yours to access without tax implications).
• You’re building long-term tax-free wealth.

PSA / non-ISA wins when:

• Your interest is comfortably within the PSA.
• You don’t want to use the £20,000 ISA allowance for cash (perhaps you’re using it for investments).
• Specific products outside the ISA wrapper offer better rates.

For someone with £15,000 of cash savings as a basic-rate taxpayer earning ~£675 interest a year:

• PSA covers all of it.
• ISA doesn’t add value tax-wise.
• The ISA wrapper still has flexibility benefits but isn’t saving tax.

For someone with £50,000 of cash savings:

• £2,250/year of interest at 4.5%.
• PSA covers £1,000. Taxable: £1,250.
• Tax at 20%: £250.
• Moving even £15,000 to a cash ISA would shelter ~£675/year of interest = save ~£135/year of tax.
• Worth using the ISA.

Worked example: optimising PSA + ISA

Mark, basic-rate taxpayer, has £30,000 cash savings across:

• £18,000 in regular savings (no ISA).
• £12,000 in cash ISA.

At 4.5% interest:

• Non-ISA savings interest: £18,000 × 4.5% = £810. Within PSA £1,000. No tax.
• ISA interest: £12,000 × 4.5% = £540. Tax-free.

Total interest: £1,350. Total tax: £0.

If Mark’s salary increased him to higher-rate band:

• Non-ISA savings interest: £810. PSA drops to £500. Taxable: £310. Tax at 40%: £124.
• ISA interest: still tax-free.

He’d benefit from moving more savings into the ISA in this case.

Internal links

• Do I pay tax on savings interest UK?
• Does an ISA count towards my personal savings allowance?
• What is the best way to save for a house deposit?

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This guide is information, not regulated financial advice. Tax rules can change between budgets — confirm on gov.uk before acting.