By Chandraketu Tripathi · Updated April 2026 · Fact-checked Tax · April 2026The Personal Savings Allowance (PSA) was introduced in April 2016, allowing most UK taxpayers to earn a certain amount of savings interest each year without paying any tax. With savings rates significantly higher than they were just three years ago, far more people are now exceeding their allowance — and facing unexpected tax bills as a result.
How the Personal Savings Allowance WorksThe PSA allows you to earn interest on savings accounts, fixed rate bonds and current accounts without paying tax on that interest, up to your allowance. The allowance is £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers (earning above £125,140) have no PSA and pay tax on all savings interest. Interest earned inside a Cash ISA does not count towards your PSA — it is always tax-free regardless of amount. Premium Bond prizes are also completely tax-free and do not use your PSA. 💡 With a £85,000 savings account earning 4.5% AER, you would earn £3,825 in interest. A basic rate taxpayer's £1,000 PSA would cover £1,000 of this — leaving £2,825 taxable at 20%, a tax bill of £565. A higher rate taxpayer would owe even more. This is why Cash ISAs have become increasingly valuable in 2026. What Happens If You Exceed Your PSA?HMRC receives information about the interest you earn directly from banks and building societies. If you exceed your PSA, HMRC will usually adjust your tax code to collect the additional tax through PAYE — reducing your monthly take-home pay. If you complete a Self Assessment tax return, you will declare the interest there. You will not typically receive a large unexpected tax bill — the adjustment usually happens gradually through your tax code. How to Protect Your Savings from TaxThe most effective way to protect savings interest from tax is to use your £20,000 annual ISA allowance. Interest earned inside an ISA is always tax-free and does not count towards your PSA. For those approaching or exceeding their PSA, maximising ISA contributions should be the first priority. NS&I Premium Bonds also offer tax-free prizes and count towards no PSA. ⭐ OUR VERDICT With savings rates at 4-5% AER, the PSA is less protective than it was when rates were under 1%. A basic rate taxpayer needs less than £22,222 in savings to exhaust their £1,000 PSA at 4.5% interest. Higher rate taxpayers exhaust their £500 allowance on just £11,111 in savings. If you have significant savings, maximising your Cash ISA allowance — £20,000 per tax year — is the single most important step to protect your interest from tax in 2026. Frequently Asked QuestionsDo I need to declare savings interest to HMRC? If your savings interest exceeds your Personal Savings Allowance, it is taxable. Banks report interest earned to HMRC automatically. If you are in PAYE employment, HMRC will usually adjust your tax code. If you complete Self Assessment, declare the interest in your tax return. You do not need to proactively notify HMRC — they receive the information directly from your bank. Does ISA interest count towards the Personal Savings Allowance? No. Interest earned inside a Cash ISA or any other ISA wrapper is completely tax-free and does not count towards your Personal Savings Allowance. This is one of the main reasons ISAs remain so valuable, particularly as savings rates have risen. What is the starting rate for savings? Non-taxpayers and low-income earners may also benefit from the savings starting rate band of up to £5,000 at 0%. If your non-savings income is below £17,570, you may be able to earn up to £5,000 of savings interest tax-free in addition to your PSA. Claim this via a R40 form or through Self Assessment. Will the Personal Savings Allowance change in 2026? The PSA has remained at £1,000 (basic rate) and £500 (higher rate) since its introduction in 2016. There are no announced plans to change it in 2026, but it is worth checking HMRC guidance each tax year as it could be adjusted in future budgets. |
Personal Savings Allowance UK 2026: How Much Interest Can You Earn Tax-Free?
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