With savings rates at multi-year highs, many savers are now earning more interest than they might expect — and some are exceeding their tax-free Personal Savings Allowance for the first time. This guide explains who pays tax on savings interest and how to calculate whether you have a liability.
For the full PocketWise savings guide, see the Savings Hub.
The Personal Savings Allowance (PSA) 2026/27
The PSA is the amount of savings interest you can earn each year tax-free.
| Tax band | Annual PSA | Income threshold |
|---|---|---|
| Basic rate taxpayer | £1,000 | Total income up to £50,270 |
| Higher rate taxpayer | £500 | Total income £50,271–£125,140 |
| Additional rate taxpayer | £0 | Total income over £125,140 |
Your tax band is based on your total income — salary, pension, rental income, dividends, and any other taxable income — not just savings interest.
Calculating your savings tax
Step 1: Total your savings interest
Add up all interest received in the tax year from:
- Savings accounts
- Fixed-term bonds
- Current accounts (some pay interest)
- Cash ISA accounts do not count — ISA interest is always tax-free
Step 2: Subtract your Personal Savings Allowance
| Your income | PSA | Interest earned | Taxable interest |
|---|---|---|---|
| £28,000 (basic rate) | £1,000 | £800 | £0 — within PSA |
| £28,000 (basic rate) | £1,000 | £1,800 | £800 |
| £65,000 (higher rate) | £500 | £1,800 | £1,300 |
| £130,000 (additional rate) | £0 | £1,800 | £1,800 |
Step 3: Apply your marginal tax rate to the taxable interest
| Rate | Taxable interest | Tax owed |
|---|---|---|
| 20% (basic rate) | £800 | £160 |
| 40% (higher rate) | £1,300 | £520 |
| 45% (additional rate) | £1,800 | £810 |
The starting rate for savings: zero tax for low earners
If your non-savings income (salary, pension) is below £17,570, you may benefit from the 0% starting rate for savings — which covers up to £5,000 of savings income.
| Non-savings income | Starting rate band available | Max interest tax-free (incl. PSA) |
|---|---|---|
| £12,570 or below (only personal allowance) | Full £5,000 | £6,000 (£5,000 + £1,000 PSA) |
| £14,570 | £3,000 | £4,000 |
| £17,570 | £0 | £1,000 (PSA only) |
Who benefits: Retirees with a small State Pension or those working part-time on low salaries can earn significant savings interest at 0%.
Example: A retiree with a State Pension of £11,000 and no other income can earn up to £6,570 in savings interest tax-free in 2026/27:
- Personal allowance covers the £11,000 State Pension: £12,570 − £11,000 = £1,570 remaining allowance
- Remaining £1,570 of personal allowance offsets first £1,570 of interest (0%)
- Starting rate band: next £3,430 of savings interest at 0% (£5,000 − £1,570 already used)
- PSA: next £1,000 at 0%
- Total tax-free interest: £6,000
Savings interest at high rates — does the maths change?
With savings rates above 4% AER in many accounts, here is the interest generated at different savings levels:
| Savings balance | Rate 4% AER | Annual interest | Tax (basic rate, £0 tax) | Tax (basic rate, £1,000 PSA used) |
|---|---|---|---|---|
| £20,000 | 4% | £800 | £0 | £0 (within PSA) |
| £30,000 | 4% | £1,200 | £0 on first £1,000 | £40 on £200 excess |
| £50,000 | 4% | £2,000 | £0 on first £1,000 | £200 on £1,000 excess |
| £100,000 | 4% | £4,000 | £0 on first £1,000 | £600 on £3,000 excess |
Even with basic-rate tax on the excess, the after-tax return remains attractive — but this calculation changes significantly for higher-rate taxpayers.
How to keep more of your savings interest
Use ISAs first
ISA interest is always tax-free regardless of your tax band. The £20,000 annual ISA allowance allows basic-rate taxpayers to shelter up to £800 of interest (at 4%) tax-free per year — and the shelter is permanent.
Split savings with a lower-earning spouse or civil partner
Interest from joint accounts is split 50:50 by default. But separately-held accounts let each person use their own PSA and personal allowance. Transferring savings to a spouse with a lower income can reduce the household tax bill.
Use Premium Bonds
Premium Bond prizes are tax-free and do not count towards your PSA. For larger savers who have used their ISA allowance and are earning above the PSA threshold, Premium Bonds offer a tax-efficient alternative.