Last reviewed: May 2026 | Source: HMRC Savings income guidance and Finance Act 2016
Key finding: The personal savings allowance has been frozen at £1,000 (basic rate) and £500 (higher rate) since its introduction by Finance Act 2016, with additional-rate taxpayers receiving no allowance, and the freeze combined with higher Bank of England base rates has pulled significantly more UK savers into the savings tax net.- £1,000 PSA for basic-rate taxpayers since 2016 (Finance Act 2016)
- £500 PSA for higher-rate taxpayers since 2016 (Finance Act 2016)
- £0 PSA for additional-rate taxpayers (HMRC savings income guidance)
The personal savings allowance UK pays £1,000 of tax-free savings interest to basic-rate taxpayers, £500 to higher-rate taxpayers, and zero to additional-rate taxpayers, the same levels set by Finance Act 2016. The allowance has not been uprated since introduction, while Bank of England base rate rose from 0.1% in late 2021 to 5.25% by 2023 before retreating, making fixed-deposit interest a material taxable income source for many savers who previously had little reportable interest. HMRC collects the tax through PAYE coding adjustments where amounts are reportable and through self-assessment for those already within that regime.
- £1,000 personal savings allowance for basic-rate taxpayers (Finance Act 2016)
- £500 personal savings allowance for higher-rate taxpayers (Finance Act 2016)
- £0 personal savings allowance for additional-rate taxpayers (HMRC guidance)
- £5,000 starting rate for savings, available to taxpayers with limited non-savings income (HMRC)
- £20,000 annual ISA allowance, unchanged since 2017/18 (HMRC ISA guidance)
The PSA pays £1,000 to basic-rate taxpayers, £500 to higher rate, and zero to additional rate
The personal savings allowance pays £1,000 of tax-free savings interest to basic-rate taxpayers, £500 to higher-rate taxpayers, and zero to additional-rate taxpayers, set out in section 12B of the Income Tax Act 2007 as inserted by Finance Act 2016. The allowance applies to interest received from banks, building societies, savings accounts, NS&I products other than tax-free ones, gilts, corporate bonds, and most peer-to-peer lending platforms. Interest is reported gross and assessed against the available allowance, with any excess taxed at the saver's marginal income tax rate.
The allowance is not transferable between spouses, unlike the marriage allowance which transfers personal allowance. Where one spouse has substantial savings and the other has minimal income, the standard mitigation route is to transfer ownership of the underlying savings asset rather than the allowance. HMRC accepts joint accounts with interest split based on beneficial ownership, with the default assumption being a 50:50 split unless evidence of a different beneficial split is provided.
The £5,000 starting rate for savings covers low-income taxpayers
The starting rate for savings of 0% applies to savings interest of up to £5,000 for taxpayers whose non-savings income is less than the personal allowance plus £5,000, providing an additional buffer for low-income savers. The interaction with the personal savings allowance is sequential: the £5,000 starting rate applies first, then the personal savings allowance covers further interest up to the relevant limit, then any remaining interest is taxed at the marginal rate. For a retiree with state pension income of £12,000 and £8,000 of savings interest, the starting rate covers £5,570 of interest (from £12,570 personal allowance up to £17,570), the personal savings allowance covers a further £1,000, and the remaining £1,430 is taxed at 20%.
The starting rate has been operationally complex for HMRC to apply through PAYE, with most taxpayers either reconciling through self-assessment or accepting a one-off adjustment after HMRC end-of-year reconciliation. The 0% rate has been at £5,000 since 2015/16 with no uprating.
Bank of England base rate moves expanded the population paying savings tax
The Bank of England base rate rose from 0.1% in late 2021 to a peak of 5.25% in August 2023, dramatically increasing the value of fixed-deposit interest and pulling materially more savers into the savings tax net under the frozen personal savings allowance. At a 0.5% deposit rate, a basic-rate taxpayer needed £200,000 of cash deposits to exceed the £1,000 PSA. At 5% deposit rates, the same threshold sat at £20,000 of deposits, a tenfold reduction in the savings volume at which tax becomes payable. HMRC compliance and reporting infrastructure was not redesigned to handle the substantial increase in savers requiring assessment.
The Bank of England base rate moved lower through 2024 and 2025 from the 5.25% peak. The PSA-equivalent deposit threshold rises proportionally as rates fall, but the £1,000 and £500 nominal allowances have not been uprated. The cumulative effect over the freeze period has been a meaningful expansion in the population paying savings tax.
ISA sheltering remains the standard mitigation route
The £20,000 annual ISA subscription limit (cash ISA, stocks and shares ISA, innovative finance ISA, and lifetime ISA combined, with the £4,000 lifetime ISA limit counting towards the £20,000 total) provides the standard mitigation route, with interest, dividends, and capital gains inside the ISA wrapper exempt from UK tax. The £20,000 limit has been unchanged since 2017/18, having risen from £15,240 in 2016/17. HMRC ISA guidance sets out the qualifying products, the transfer rules between providers, and the lifetime ISA Government bonus mechanism (25% of contributions up to £1,000 per year for under-40s saving for first home or retirement).
The lifetime ISA has specific withdrawal rules: penalty-free withdrawal is permitted only for a first home purchase up to £450,000 or at age 60+. Other withdrawals attract a 25% government penalty that reclaims more than the original bonus. HMRC operates the lifetime ISA bonus through the ISA provider rather than through self-assessment.
HMRC collects savings tax through PAYE coding or self-assessment
HMRC collects savings income tax through PAYE coding adjustments for most taxpayers (with the bank or building society no longer deducting basic-rate tax at source since the 2016 reform) or through self-assessment for taxpayers already in that regime. Banks and building societies report interest paid to HMRC under the standard returns of information by deposit takers. HMRC then adjusts the taxpayer's PAYE code to recover the estimated tax on savings income in the following tax year, or issues a simple assessment where the amount is significant. The reconciliation produces the final liability after the end of the tax year.
Taxpayers expecting to owe savings tax can pay sooner via voluntary on-account payments or by entering self-assessment. The default mechanism for those outside self-assessment is the PAYE code adjustment, which spreads the liability across the following tax year rather than requiring an upfront payment.
Premium Bonds, ISA interest, and certain NS&I products remain outside the tax framework
Premium Bond winnings, ISA interest, and prizes from certain other NS&I products remain exempt from UK income tax, with the framework set out in the relevant ISA and NS&I rules and unchanged in the recent reform window. Premium Bond prizes are exempt under the Income Tax (Trading and Other Income) Act 2005 as amended. The exemption applies to all prize amounts, with no cap. ISA interest is exempt under the broader ISA wrapper rules. NS&I direct saver and income bonds, by contrast, pay taxable interest that counts towards the personal savings allowance.
The Premium Bond exemption has been a stable feature for over six decades and continues to make Premium Bonds an attractive holding for higher-rate and additional-rate taxpayers with substantial cash reserves, despite the variable prize return rate. The 2.20% prize fund rate published by NS&I at the time of writing applied across the bond holding.
Joint accounts split interest 50:50 by default
Interest on joint accounts is treated as split 50:50 between the joint holders by default for income tax purposes, with the split adjustable on evidence of a different beneficial ownership ratio. The default split is set out in HMRC guidance and reflects the long-standing approach to joint asset taxation. Couples where one partner is a higher-rate taxpayer and the other has unused personal allowance or personal savings allowance can benefit from formal documentation evidencing a different beneficial ownership ratio, supported by Form 17 where the asset is held jointly by married couples or civil partners.
The Form 17 election is restricted to married couples and civil partners and requires that the underlying beneficial ownership match the declared income split. The default 50:50 treatment applies in the absence of evidence to the contrary, and HMRC treats unmarried joint owners on the basis of the legal title arrangements.
| Taxpayer type | Personal savings allowance | ISA annual limit | Marginal rate on interest above PSA |
|---|---|---|---|
| Basic rate | £1,000 | £20,000 | 20% |
| Higher rate | £500 | £20,000 | 40% |
| Additional rate | £0 | £20,000 | 45% |
How much savings interest is tax free in the UK?
The personal savings allowance is £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and zero for additional-rate taxpayers per HMRC savings income guidance. The £5,000 starting rate for savings also provides a 0% band for low-income taxpayers whose non-savings income is less than the personal allowance plus £5,000.
Has the personal savings allowance freeze ended?
No. The personal savings allowance has been at £1,000 (basic) and £500 (higher) since its introduction in 2016 by Finance Act 2016, with no uprating legislated. The allowance has therefore lost real value to inflation each year since 2016.
How is savings interest tax UK collected by HMRC?
HMRC collects savings tax through PAYE coding adjustments for most taxpayers, using interest reporting received from banks and building societies. Taxpayers in self-assessment report savings interest on the return. Banks and building societies no longer deduct basic-rate tax at source under the 2016 reform.
What is the PSA 2025?
The personal savings allowance for 2025/26 is unchanged from prior years: £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and zero for additional-rate taxpayers. The same levels apply for 2026/27 under the current legislative framework.
Does ISA interest count towards the personal savings allowance?
No. ISA interest is exempt from UK income tax under the ISA wrapper rules, with no impact on the personal savings allowance available for non-ISA interest. The £20,000 annual ISA subscription limit operates independently of the personal savings allowance.
Are Premium Bond winnings taxable?
No. Premium Bond winnings are exempt from UK income tax under the relevant NS&I and income tax legislation, regardless of the amount won. The exemption applies to the prize itself; interest on cash held outside an ISA wrapper continues to count against the personal savings allowance under standard rules.
Related guides
How we verified this
This article draws on the following primary UK sources:
- HMRC Savings and investment income guidance
- Finance Act 2016 (legislation.gov.uk) for the PSA legislation
- Income Tax Act 2007 (legislation.gov.uk) section 12B for the personal savings allowance
- Bank of England base rate data and Monetary Policy Committee announcements
- HMRC ISA guidance and lifetime ISA bonus rules
- NS&I product information and prize fund rate publications
- gov.uk Tax on savings interest
No secondary aggregators, no press releases from commercial providers, and no statistics without a named government or regulatory source were used.
