Understanding Your Personal Savings Allowance
The Personal Savings Allowance (PSA) was introduced in April 2016 and allows you to earn a certain amount of savings interest tax-free each year, depending on your income tax band. Before the PSA, banks and building societies automatically deducted 20% tax from interest payments. Now, savings interest is paid gross (without tax deducted), and only the amount exceeding your PSA is taxable.
How the PSA Works
Basic rate taxpayers (earning up to £50,270) receive a £1,000 PSA. Higher rate taxpayers (earning £50,270 to £125,140) receive £500. Additional rate taxpayers (earning over £125,140) receive no PSA at all. Any interest above your PSA is added to your taxable income and taxed at your marginal rate.
The Starting Rate for Savings
There is an additional tax-free band called the Starting Rate for Savings, worth up to £5,000. This applies if your non-savings income (salary, pensions, rental income) is below £17,570 (the personal allowance plus £5,000). For each pound of non-savings income above the personal allowance, the starting rate band reduces by a pound. This is particularly beneficial for retirees or part-time workers with low earnings but significant savings.
When You Might Owe Tax on Savings
With interest rates higher than they have been in years, more savers are exceeding their PSA. For example, a basic rate taxpayer with £25,000 in a savings account paying 4.5% would earn £1,125 in interest - £125 over their PSA. HMRC usually adjusts your tax code to collect this tax automatically through PAYE if you are employed or receive a pension. Self-assessment taxpayers must declare it on their tax return.
Frequently Asked Questions
Does ISA interest count towards my PSA?â–¾
No. Interest earned in any type of ISA (Cash ISA, Stocks & Shares ISA, Lifetime ISA) is completely tax-free and does not count towards your PSA. Similarly, Premium Bond prizes and some NS&I products are tax-free. Only interest from non-ISA savings accounts, current accounts, and peer-to-peer lending counts.
How does HMRC know about my savings interest?â–¾
Banks and building societies report your savings interest directly to HMRC each year. If you exceed your PSA, HMRC will normally adjust your PAYE tax code the following year to collect the tax due. You may also receive a Simple Assessment letter. If you file a Self Assessment tax return, you must include your savings interest on the return.
How can I reduce tax on my savings interest?â–¾
The most effective strategy is to use your full ISA allowance (£20,000per year). All interest in an ISA is tax-free regardless of your income. Beyond that, consider Premium Bonds (prizes are tax-free) or investing via a Stocks & Shares ISA or pension. Couples can also split savings so both partners use their individual PSA.
Calclypso Editorial Team
PSA thresholds verified against HMRC 2025-26 rates. Last updated: April 2026. This calculator is for estimation purposes only. For official guidance, refer to GOV.UK.