What is the Personal Savings Allowance?

The Personal Savings Allowance (PSA) is the amount of interest you can earn on your savings each tax year without paying tax on it. It applies to interest from ordinary savings accounts and similar products held outside an ISA (Individual Savings Account).  

For many people, it means their bank interest is covered automatically. However, higher interest rates and larger cash balances mean more savers now need to pay attention to it.  

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How much is the Personal Savings Allowance?

How much you get depends on your Income Tax band. If you are a basic rate taxpayer, your Personal Savings Allowance is £1,000. If you are a higher rate taxpayer, it is £500. If you are an additional rate taxpayer, it is £0.  

This matters more than it used to because savings rates have been much healthier in recent years. When interest rates were very low, many people did not come close to using their allowance. Now, a relatively sizeable balance in a competitive account can create enough interest to bring the allowance into play. For example, £25,000 in an account paying 4% will produce £1000 of interest per year

You should also remember that HMRC works out your tax band by adding your savings interest to your other income. So, if you are close to the higher rate threshold, your interest could push you into the higher rate band for income tax. That does not mean you should avoid earning interest, but it does mean you should know where you stand before the end of the tax year.

What interest is covered by my Personal Savings Allowance?

Your Personal Savings Allowance covers taxable savings interest which usually means interest from bank and building society accounts that are not sheltered inside an ISA. It can include interest from easy access accounts, fixed rate bonds, notice accounts, regular savers and current accounts that pay interest. It also includes interest payments (coupons) received from gilts.

It can also include interest from some other savings products, so it is worth checking the tax position before assuming that interest is outside the rules. HMRC’s guidance is pretty clear though, that the allowance applies to savings interest, and that the level of allowance depends on your Income Tax band.  

The key word here is interest. The allowance is not designed for dividends from shares, rental income, capital gains or investment growth. Those areas have their own rules and allowances. But, if you have several different types of income, it is sensible to look at the whole picture rather than treating your savings in isolation.

What is the ISA allowance vs the Personal Savings Allowance?

A cash ISA, or Individual Saving Account, and the Personal Savings Allowance both help you reduce tax on savings, but they work in very different ways.

The ISA allowance is the amount you can pay into ISAs each tax year. For the current tax year, which runs from 6 April 2026 to 5 April 2027, you can save up to £20,000 into ISAs. You can put that into one ISA or split it across different types of ISA, within the rules. GOV.UK also confirms that money kept in ISAs remains tax free while it stays inside the ISA wrapper.  

The Personal Savings Allowance, by contrast, applies to interest on taxable savings accounts outside cash ISAs. Most banks and building societies pay your interest Gross of tax – i.e. they do not take off any tax that may be payable to HMRC. So the Personal Savings Allowance simply gives you a band of savings interest that is taxed at 0 percent, provided you qualify for the allowance.

A cash ISA can therefore be useful if you are already fully using your Personal Savings Allowance, if you expect to use it in future, or if you want to build a pot where the interest does not need to be considered for savings tax. For lower balances, a standard savings account may still be attractive, especially if it pays a better rate and the interest you earn remains within your allowance. The right answer is not always “ISA first”. It depends on your tax position, your balance, the rate on offer and whether you are likely to become a higher rate taxpayer.

What happens if I go over the UK Personal Savings Allowance?

If your savings interest goes over your Personal Savings Allowance, only the excess is taxable. You do not lose the allowance altogether, unless you become an additional rate taxpayer. You should also be aware that if you become a higher rate taxpayer, your Personal Savings Allowance will half, to £500.

In many cases, HMRC collects the tax automatically by changing your tax code. This often applies if you are employed or receive a pension through PAYE. If you already complete a Self Assessment tax return, you usually report the savings interest there. Banks and building societies normally pay interest without deducting tax, so it is your overall tax position that decides whether anything is due.

The rate of tax depends on the band the interest falls into. At present, savings income is taxed at the same rates as Income Tax for basic, higher and additional rate taxpayers, although the Government has announced that tax rates on savings income will rise by two percentage points from April 2027. This means that a basic rate taxpayer will pay 22%, a higher rate taxpayer will pay 42% and an additional rate taxpayer will pay 47% tax on savings income.

Going over the allowance does not result in paying a fine or penalty. It simply means some of your interest becomes taxable. From a `planning point of view, it may be a prompt to review whether more of your cash should sit in ISAs, whether a spouse or civil partner has unused allowances, or whether your savings are spread in the most tax efficient way.

Does all interest count towards the Personal Savings Allowance in the UK?

Not quite, as some interest is already tax free and does not need your Personal Savings Allowance. Interest earned inside a cash ISA is the most common example, because ISA interest is sheltered from Income Tax, regardless of how much. Premium Bond prizes are also tax free, although they are prizes rather than interest.

Interest from ordinary savings accounts usually does count. That includes accounts with banks, building societies and National Savings and Investments products where the interest is taxable. The exact treatment can vary by product, so it is worth checking before you commit a large sum.

You should also be aware of the starting rate for savings, which can help people on lower incomes. The starting rate for savings can be up to £5,000, but every £1 of other income above your Personal Allowance reduces it by £1. This is separate from the Personal Savings Allowance and can be very valuable if your income from work or pensions is modest.

This is one of the areas where people can accidentally underestimate their position. Someone with a low income may be able to receive more savings interest tax free than they expected, because the Personal Allowance, the starting rate for savings and the Personal Savings Allowance can all interact.

Is the Personal Savings Allowance in addition to my Personal Allowance?

Yes. The standard Personal Allowance is £12,570 for the 2026 to 2027 tax year. This is the amount of income most people can receive before paying Income Tax. But the Personal Allowance reduces once adjusted net income goes above £100,000 and is lost completely at £125,140 or above.  

The Personal Savings Allowance sits alongside the Personal Allowance, but it is not quite the same type of allowance. Technically, it gives eligible savings income a 0 percent tax rate but - that savings income within the Personal Savings Allowance still counts as taxable income, even though it is taxed at 0 percent.  

That distinction can matter if your income is close to a tax threshold. Your interest may not create a tax bill in itself, but it can still form part of the calculation that decides which tax band you fall into.

Used well, the Personal Savings Allowance is a useful part of your savings toolkit. It should not be viewed in isolation, though. The best approach is to know your tax band, check how much interest your savings are likely to generate, compare taxable accounts with cash ISAs, and make sure your money is working hard without creating avoidable tax.

If you’d like to find out more or want to see how you can structure your savings and investments in the most tax efficient way, why not get in a touch for a free initial consultation.

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The Financial Conduct Authority (FCA) does not regulate cash flow planning or tax.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.