UK Savings Interest Tax: Personal Savings Allowance Explained

The Personal Savings Allowance (PSA) was introduced in April 2016 to remove the previous deduction of tax at source by banks on savings interest. Banks now pay interest gross; the saver's PSA covers the first slice tax-free, and any excess is taxed at the marginal income tax rate.

This guide covers the PSA at each tax band, the interaction with the starting rate for savings, the reporting routes through PAYE and Self-Assessment, and the role of ISAs as a parallel framework outside the PSA structure.

PSA at each tax band

Basic-rate taxpayers receive GBP 1,000 of tax-free savings interest a year under the PSA. Higher-rate taxpayers receive GBP 500. Additional-rate taxpayers receive nil. The PSA was set at these levels at introduction in 2016 and has not changed since.

The PSA is determined by the taxpayer's marginal band including the savings interest itself. A basic-rate taxpayer whose interest pushes them into higher rate has the PSA reduced to GBP 500 from that point. The mechanic stacks: salary first, then savings interest, then dividends - PSA is set on the band reached after non-savings income but before savings interest is added.

Worked example: a basic-rate taxpayer with GBP 30,000 salary and GBP 800 savings interest. PSA is GBP 1,000 (set on the basic-rate position). The GBP 800 interest is within PSA, no tax due. The same taxpayer with GBP 30,000 salary and GBP 1,500 interest: PSA is still GBP 1,000 (the GBP 1,500 does not push the salary-plus-savings total into higher rate). GBP 500 of interest is taxed at 20% = GBP 100.

A taxpayer with GBP 45,000 salary and GBP 8,000 interest: the GBP 8,000 pushes the stack from GBP 45,000 (basic) past GBP 50,270 (higher rate boundary) into higher rate territory. Salary + interest stacks: 12,570 PA + 32,430 at basic + 5,000 (interest absorbed in basic rate to fill up) + 3,000 (interest at higher rate). PSA is GBP 500 (higher rate taxpayer post-stack). The GBP 500 PSA covers the first slice of interest; the remainder at the appropriate band rate.

The starting rate for savings

The Starting Rate for Savings (SRS) adds an extra GBP 5,000 band at 0% to the PSA. The SRS is reduced GBP 1 for every GBP 1 of non-savings non-dividend income above the Personal Allowance. A taxpayer with GBP 12,570 of salary uses the full GBP 5,000 SRS; a taxpayer with GBP 17,570 of salary has the SRS fully tapered to zero.

The SRS is most useful for low-earnings savers: retirees with pension income below GBP 17,570, students with summer-job earnings, working partners with very part-time roles. It allows them to receive significant savings interest with no tax up to the combined GBP 17,570 income figure.

Worked example: a retiree with GBP 14,000 of pension income and GBP 4,500 of bank interest. SRS available: GBP 5,000 less (14,000 - 12,570) = GBP 5,000 less GBP 1,430 = GBP 3,570 of SRS remaining. Plus PSA of GBP 1,000 (basic-rate position). Total tax-free interest capacity: GBP 4,570. The full GBP 4,500 of interest is tax-free.

Edge case: the SRS does not extend the PSA - it sits within the existing 0% band created by the PA. A taxpayer with high savings interest pushing them past the basic-rate threshold cannot use the SRS for the slice in higher rate. The SRS and PSA work together for taxpayers near or below the Personal Allowance, not for higher earners.

Reporting and PAYE adjustments

Banks and building societies report taxable savings interest annually to HMRC under the Reporting of Savings Income Information Regulations 2003. The reports cover interest paid in the tax year ending 5 April, submitted to HMRC by 30 June following.

HMRC uses the bank reports to assess whether tax is due. For taxpayers within the PSA, no tax is due and no action is needed. For taxpayers above the PSA, HMRC normally adjusts the PAYE tax code for the following year to collect the tax through monthly deductions on employment or pension income.

Self-Assessment taxpayers report interest on the relevant section of their SA return (untaxed income from UK interest). The SA system uses the same band-stacking rules; the tax due on interest above PSA is calculated as part of the overall SA liability.

Worked example: a higher-rate taxpayer with GBP 2,000 of bank interest in 2025/26. PSA covers GBP 500; the remaining GBP 1,500 is taxed at 40% = GBP 600. HMRC sees the bank reports in 2026, adjusts the 2026/27 tax code to collect GBP 600 over the year (around GBP 50 a month additional deduction). The taxpayer sees the adjusted code in their coding notice.

ISA savings versus non-ISA savings

ISA interest is entirely outside the PSA framework. A saver with GBP 30,000 in a Cash ISA earning GBP 1,200 of interest pays no tax regardless of band. The ISA wrapper protects the interest permanently while the funds remain in the ISA.

The PSA versus ISA decision depends on tax band, rate differential, and long-term plans. A basic-rate saver with interest comfortably under PSA may not need ISA shelter for current savings; non-ISA accounts at marginally higher rates can net more. A higher-rate saver with interest above the GBP 500 PSA benefits from moving as much as possible to ISA shelter.

The longer-term advantage of ISA is that the allowance is use-it-or-lose-it each year. Building up GBP 20,000 of ISA contributions each year compounds the tax shelter; non-ISA savings of similar size face increasing tax exposure as the balance grows.

Practical action: most savers benefit from using the ISA allowance even if the immediate tax advantage is small. The wrapper compounds tax-free indefinitely, and savers who later move into higher-rate bands (pay rise, promotion, inheritance, redundancy lump sum) find their existing ISA holdings already sheltered.

Joint accounts and shared interest

Interest on a jointly-held savings account is split equally between the named holders for tax purposes, regardless of who paid in the funds. Each holder's PSA applies to their half. A married couple with GBP 4,000 of joint interest, both basic-rate, has GBP 2,000 each of interest, both within the GBP 1,000 PSA - no tax due.

Different-band couples can plan around the split. If one partner is higher-rate and the other basic-rate, holding interest-bearing accounts in the basic-rate partner's name alone (rather than jointly) keeps more interest within the higher PSA. This is a common planning step where one partner earns substantially more.

Spousal transfers of cash assets are tax-free under section 58 TCGA 1992 (no-gain no-loss). Moving GBP 50,000 of cash from the higher-rate partner to the basic-rate partner allows the basic-rate partner's PSA of GBP 1,000 to apply to the interest, instead of the higher-rate partner's GBP 500 PSA.

Worked example: a couple - one higher-rate, one basic-rate - holds GBP 80,000 jointly at 4% (GBP 3,200 interest a year). Split 50/50: each gets GBP 1,600 interest. The higher-rate partner pays 40% on GBP 1,100 = GBP 440. The basic-rate partner pays 20% on GBP 600 = GBP 120. Total tax GBP 560. Restructuring to GBP 80,000 in the basic-rate partner's sole name: interest GBP 3,200, less GBP 1,000 PSA, GBP 2,200 at 20% = GBP 440. Saving GBP 120 a year, plus future-year compounding benefits.

Frequently asked questions

What is the UK Personal Savings Allowance?

Tax-free interest allowance: GBP 1,000 for basic-rate taxpayers, GBP 500 for higher-rate, nil for additional-rate. Above the allowance, interest is taxed at the marginal income tax rate. The PSA was introduced in April 2016 to replace the previous deduction at source by banks. Banks now pay interest gross; HMRC adjusts PAYE codes or processes through Self-Assessment to collect any tax due on interest above the PSA.

Does ISA interest count toward PSA?

No. ISA interest is entirely outside the PSA framework. A saver with substantial ISA interest still has the full PSA available for non-ISA savings. The ISA wrapper protects interest permanently while the funds remain in the ISA. For savers building up large cash positions over years, prioritising ISA contributions each year compounds the tax shelter and reduces non-ISA interest exposure to tax.

What is the starting rate for savings?

A GBP 5,000 band at 0% for savings interest, on top of the Personal Allowance. The SRS is reduced GBP 1 for every GBP 1 of non-savings non-dividend income above the Personal Allowance, so it is fully tapered at GBP 17,570 of salary or pension. Most useful for low-earnings savers: retirees with modest pension income, students with summer earnings, working partners with very part-time roles. Higher earners cannot use the SRS.

How does HMRC know about my savings interest?

Banks and building societies report taxable interest annually to HMRC under the Reporting of Savings Income Information Regulations 2003. The reports cover interest paid in the tax year ending 5 April, submitted to HMRC by 30 June following. HMRC uses the reports to adjust PAYE codes for the following year (where additional tax is due) or to assess Self-Assessment returns. Most savers within PSA need no action.

Do I have to pay tax on savings if I'm self-employed?

Yes if interest exceeds PSA. Self-employed Self-Assessment taxpayers report savings interest on the relevant section of the SA return. The band-stacking rules apply: salary or self-employed profit stacks first, then savings interest, then dividends. PSA covers the first GBP 1,000 (basic-rate) or GBP 500 (higher-rate) of interest; the remainder is taxed at the band rate. The SA system calculates the total liability across all income types.