Most UK savers pay no tax on their savings interest — thanks to the Personal Savings Allowance and Starting Rate for Savings. For 2026/27, the rules are clear: £1,000 tax-free for basic-rate taxpayers, £500 for higher-rate, £0 for additional-rate. But the £5,000 starting rate adds another layer that low earners often miss.
The Personal Savings Allowance (PSA)
The Personal Savings Allowance lets you earn a set amount of interest from savings, bank accounts and bonds before you pay any income tax on it. For 2026/27, the allowance depends on your income tax band:
| Tax band | PSA for 2026/27 |
|---|---|
| Basic rate (20%) | £1,000 tax-free interest |
| Higher rate (40%) | £500 tax-free interest |
| Additional rate (45%) | £0 — no allowance |
Above your PSA, interest is taxed at your marginal rate of income tax — 20%, 40% or 45%.
This means a basic-rate taxpayer with £20,000 in a savings account at 5% interest earns £1,000 of interest — exactly within the PSA, so zero tax. The same saver with £50,000 at 5% would earn £2,500 of interest, pay tax on £1,500 of it at 20% = £300.
The Starting Rate for Savings: an extra £5,000 at 0%
On top of the PSA, there's a second allowance many people miss: the Starting Rate for Savings. This applies a 0% rate to up to £5,000 of savings interest — but only if your other income is low enough.
The mechanics: the starting rate sits between the Personal Allowance and the Basic rate band. If your non-savings income is below £12,570 (the Personal Allowance), you get the full £5,000 starting rate. Above £12,570, it tapers: for every £1 of non-savings income above the Personal Allowance, you lose £1 of starting rate. By the time your non-savings income reaches £17,570, the starting rate is fully used up.
In practice, this means the Starting Rate for Savings benefits:
- Low earners with significant savings interest (part-time workers, students)
- Retirees living mostly on savings interest with modest pension income
- Career break savers (parental leave, sabbatical, gap year)
- Self-employed in low-income years
Someone earning £5,000 from employment plus £10,000 of savings interest pays zero tax: the first £5,000 of interest falls in the starting rate, the next £1,000 falls in the PSA, and the remaining £4,000 falls in the basic rate band — but the Personal Allowance has £7,570 of unused headroom available to absorb it. Total income tax: zero.
ISAs: tax-free outside the PSA entirely
Cash ISAs (and Stocks & Shares ISAs) don't count toward your PSA or Starting Rate. Interest earned inside an ISA is completely tax-free regardless of your income, your tax band, or how much interest you earn.
The annual ISA allowance for 2026/27 is £20,000. You can split this between different ISA types in the same tax year.
When to prefer an ISA over ordinary savings:
- You're a higher or additional-rate taxpayer — ISAs bypass your limited (or zero) PSA
- You expect to hold savings for multiple years — the tax-free compounding matters more over time
- You're near the PSA threshold — an ISA keeps your non-ISA interest within the allowance
- You're near a tax band threshold — ISA interest doesn't count toward your adjusted net income
When an ISA offers less advantage:
- You're a basic-rate taxpayer with less than £1,000 of interest — your PSA already covers it
- You need short-term access and ISA rates are lower than standard savings accounts
How HMRC collects tax on savings above the PSA
UK banks and building societies no longer deduct tax at source from savings interest (they did until April 2016). Today, interest is paid gross, and HMRC collects any tax owed separately.
If you're employed (PAYE), HMRC typically adjusts your tax code to collect the savings tax through your salary. You'll see a "savings income" adjustment on your code notice.
If you file self-assessment, you declare savings interest on your return. HMRC uses this to calculate your bill.
Banks report interest payments over £10,000/year to HMRC automatically, so large savers don't need to track everything themselves — but it's still a good idea to keep statements.
Joint accounts
Interest from joint savings accounts is split equally between account holders for tax purposes. If you hold a joint account with a spouse where one of you is a basic-rate taxpayer and the other earns less than the Personal Allowance, the non-taxpayer can effectively double the PSA (£1,000 per person instead of £1,000 household).
For couples where one partner has no other income, moving savings into their name entirely makes the most of both the Personal Allowance and the Starting Rate for Savings — potentially £17,570 of tax-free savings interest for that partner.
What counts as savings interest for the PSA
Your PSA covers:
- Interest from UK bank and building society accounts
- Interest from savings bonds (including Premium Bonds prizes, though those are already tax-free)
- Interest from NS&I accounts (except tax-exempt products)
- Interest distributions from authorised unit trusts and OEICs
- Peer-to-peer lending interest
- Interest on compensation payments
Your PSA does not cover:
- Dividends (those have a separate £500 dividend allowance)
- Rental income (taxed as regular income)
- ISA interest (already tax-free)
- Pension income (taxed as regular income)
Frequently asked questions
How much savings interest is tax-free in the UK?
Basic-rate taxpayers: £1,000/year (PSA). Higher-rate: £500. Additional-rate: £0. Plus up to £5,000 Starting Rate for Savings if your other income is low. ISA interest is unlimited tax-free.
What's the Personal Savings Allowance for 2026/27?
Unchanged from previous years: £1,000 for basic-rate taxpayers, £500 for higher-rate, £0 for additional-rate. The PSA has been frozen at these levels since it was introduced in 2016.
Do I pay tax on my ISA interest?
No. Cash ISA and Stocks & Shares ISA interest is completely tax-free, outside the PSA system entirely. Annual allowance is £20,000 across all ISA types.
How does the Starting Rate for Savings work?
Up to £5,000 of savings interest at 0% tax, but only if your non-savings income is below £17,570. Fully available if non-savings income is at or below the £12,570 Personal Allowance; tapers to zero as non-savings income rises to £17,570.
Do banks deduct tax on my interest automatically?
No, not since April 2016. UK banks pay interest gross. HMRC collects any tax owed separately — typically via your PAYE tax code or self-assessment return.
What if I'm a higher-rate taxpayer with lots of savings?
Consider: (1) maximise ISA contributions (£20,000/year tax-free), (2) use pension contributions to reduce your taxable income below the higher-rate threshold, (3) if married and spouse earns less, shift savings into their name.
Quick links
- UK Tax Guide 2026/27 — complete reference
- UK Income Tax Rates — how tax bands work
- UK Personal Allowance — the £12,570 tax-free threshold
- UK Tax Year 2026/27 — when allowances reset
- Best ISA Accounts UK — comparison of current ISA providers
