Savings interest rates have risen sharply since 2022, and many people are now earning far more in interest than they realise — sometimes tipping over their tax-free allowance without knowing it. The Personal Savings Allowance (PSA) changed in April 2024, and the interaction with ISAs, the starting rate, and PAYE adjustments can be confusing.
This guide sets out exactly how much interest you can earn tax-free in 2026/27 and what happens if you go over.
Personal Savings Allowance: 2026/27 Rates
| Tax rate | PSA 2026/27 |
|---|---|
| Basic rate (20%) | £500 |
| Higher rate (40%) | £500 |
| Additional rate (45%) | £0 |
Note: The PSA was cut from £1,000 (basic rate) to £500 in the 2024/25 tax year. This matters significantly if you have large savings — at 5% interest, a £10,000 savings pot generates £500 in interest, hitting the PSA exactly.
What Counts as Savings Income?
The PSA applies to interest from:
- Easy-access savings accounts
- Fixed-rate savings bonds
- Current accounts paying credit interest
- Child savings accounts (parent’s PSA if child is under 18)
- NS&I savings certificates and direct saver
- Peer-to-peer lending interest
- Credit union interest
Does NOT apply to:
- ISA interest (always tax-free, no PSA used)
- Dividends (taxed under the Dividend Allowance, not PSA)
- Premium Bond prizes (always tax-free)
- Interest from NS&I Premium Bonds (N/A — they pay prizes, not interest)
ISA Interest vs PSA: Key Distinction
ISAs and the PSA are completely separate:
| Account type | Tax-free treatment |
|---|---|
| Cash ISA | Always tax-free — no PSA used |
| Stocks & Shares ISA | Dividends and interest always tax-free |
| Regular savings account | PSA applies (£500 basic/higher rate) |
| Fixed-rate bond (non-ISA) | PSA applies |
If you hold both, your ISA interest does not eat into your PSA — they run in parallel. This is why moving savings from non-ISA accounts into ISAs is tax-efficient once you start approaching or exceeding the PSA.
When You Exceed the PSA
If your savings interest exceeds your PSA:
- PAYE taxpayers: HMRC typically adjusts your tax code to collect the extra tax through your payslip. Your employer deducts slightly more tax each month. You don’t usually need to file a Self-Assessment return unless the excess interest is above £10,000.
- Self-Assessment filers: Report savings interest on the SA100 (SA savings pages). Pay the extra tax with your annual bill.
- Non-taxpayers: Complete form R85 or R40 to reclaim any tax deducted, or confirm to the bank you are a non-taxpayer.
Banks and building societies report interest paid directly to HMRC, so they can usually reconcile your account without you filing a return.
The Starting Rate for Savings
People with low incomes get an additional tax-free savings band called the starting rate for savings, which can be worth up to £5,000 at 0%.
How It Works
Your non-savings income (salary, pension, rental income) is compared to £12,570 (your Personal Allowance):
- If non-savings income is less than £12,570: full £5,000 starting rate band available
- For every £1 of non-savings income above £12,570, £1 of the starting rate band is lost
- If non-savings income exceeds £17,570: no starting rate band at all
Example: Retired Person on Low Pension
| Amount | |
|---|---|
| State pension | £11,500/year |
| Savings interest | £6,000/year |
| Personal Allowance | £12,570 |
| Taxable non-savings income | £0 (below PA) |
| Starting rate band used | £5,000 |
| PSA | £500 |
| Remaining savings interest taxable | £500 (£6,000 − £5,000 − £500) |
| Tax owed on savings @ 20% | £100 |
Without the starting rate for savings, this retiree would have owed 20% on £5,500 = £1,100. The starting rate saves £1,000.
What Happens to Unused PSA?
The PSA cannot be carried forward — it is use-it-or-lose-it within each tax year. Similarly, the starting rate for savings resets each April.
PSA and Joint Accounts
Where two people hold a joint savings account, the interest is split equally between them (unless a different split is declared). Each person applies their own PSA to their share.
| Joint account interest | Partner A (basic rate) | Partner B (higher rate) | Tax owed |
|---|---|---|---|
| £400 (£200 each) | Covered by PSA | Covered by PSA | £0 |
| £1,200 (£600 each) | £100 taxable × 20% = £20 | £100 taxable × 40% = £40 | £60 total |
NS&I Accounts and Premium Bonds
| NS&I product | Tax treatment |
|---|---|
| Premium Bond prizes | Always tax-free (not interest) |
| NS&I Direct Saver | Interest counts towards PSA |
| NS&I Income Bonds | Interest counts towards PSA |
| NS&I Premium Bonds | No interest; prizes are tax-free |
| NS&I Guaranteed Income Bonds | Interest counts towards PSA |
| NS&I Junior ISA | Tax-free (ISA wrapper) |
Tax on Savings: The Order of Calculations
HMRC applies income in a specific order when calculating your tax:
- Non-savings income (salary, pension, self-employment, rental)
- Savings income
- Dividend income
This means savings income sits in the middle — it uses the Personal Allowance if non-savings income has not already used it all, then the starting rate band, then the PSA, and finally pays tax at the savings rate.
When High Interest Rates Make ISAs Valuable
With rates at 5%+, the maths of ISA vs non-ISA savings is compelling:
| Savings amount | Interest at 5% | PSA used | Tax owed (basic rate) |
|---|---|---|---|
| £5,000 | £250 | £250 used | £0 |
| £10,000 | £500 | £500 used | £0 |
| £15,000 | £750 | £500 used | £50 (on £250 excess) |
| £30,000 | £1,500 | £500 used | £200 (on £1,000 excess) |
| £50,000 | £2,500 | £500 used | £400 (on £2,000 excess) |
Once your non-ISA savings exceed roughly £10,000 at current rates, an ISA becomes important for tax efficiency. The annual ISA limit is £20,000, so you can shelter substantial sums over a few years.