Tax on Savings Interest: The Personal Savings Allowance Explained (2026/27)

The good news about tax on savings is that most people in the UK never pay a penny on their interest. Thanks to the Personal Savings Allowance, a chunk of your interest is tax-free every year - and if you save inside an ISA, that interest is tax-free without limit. This guide explains exactly how the rules work for the 2026/27 tax year, who actually pays tax on savings interest, and how to work out your own position in a few minutes.

We'll keep the jargon to a minimum, use real numbers, and flag the mistakes that trip people up. By the end you'll know whether you owe anything at all - and what to do if you do.

Do I pay tax on savings? The short answer

Whether you pay tax on savings interest depends on three things: how much interest you earn, how much you earn from other income (such as a salary or pension), and where you hold your money. Interest from ordinary savings accounts, current accounts, fixed-rate bonds, credit union accounts and most peer-to-peer lending counts as taxable savings income. Interest inside a cash ISA does not - it is always tax-free.

The reason most people ask "do I pay tax on savings?" and end up owing nothing is that there are three separate allowances working in your favour, layered on top of each other:

• Your Personal Allowance - £12,570 of total income before any income tax at all.
• The starting rate for savings - up to £5,000 of savings interest taxed at 0% for people with low non-savings income.
• The Personal Savings Allowance (PSA) - up to £1,000 of savings interest tax-free on top.

Only once all three are used up does interest get taxed - and even then it's taxed at your normal income tax rate, not a special savings rate.

What is the Personal Savings Allowance?

The Personal Savings Allowance lets you earn a set amount of savings interest each tax year without paying tax on it. The amount you get depends on your highest rate of income tax:

So a basic-rate taxpayer can earn £1,000 of interest tax-free, a higher-rate taxpayer £500, and an additional-rate taxpayer gets no allowance at all. The income figures above are your total income (salary, pension, rental income and so on), and your savings interest itself counts towards deciding which band you fall in - which is why a big lump of interest can occasionally push you from basic into higher rate. We'll see that in the worked example.

The starting rate for savings - the hidden allowance

The starting rate for savings is the bit people forget, and it can be worth far more than the PSA. If your non-savings income (wages, pension, self-employment, rent) is low, you can earn up to £5,000 of savings interest at a 0% "starting rate" - on top of your Personal Allowance and your PSA.

Here's the catch: the £5,000 band is reduced by every £1 of non-savings income you have above the £12,570 Personal Allowance. So:

• If your non-savings income is £12,570 or less, you get the full £5,000 starting-rate band.
• For every £1 of non-savings income above £12,570, you lose £1 of the band.
• Once your non-savings income reaches £17,570, the starting rate for savings is gone entirely.

This is brilliant news for pensioners, part-time workers and anyone living mainly off savings. Someone with a £12,000 pension and a pot of savings could potentially receive thousands in interest completely tax-free by combining the Personal Allowance, the full starting-rate band and the PSA.

ISAs sit completely outside all of this

Interest earned inside a cash ISA is tax-free, full stop - it doesn't touch your Personal Savings Allowance or the starting rate, and it doesn't count towards your income for working out your tax band. You can pay up to £20,000 into ISAs in 2026/27 (across cash ISAs, stocks & shares ISAs and others combined). Because ISA interest is invisible to the taxman, savers with larger pots often fill their ISA allowance first and keep taxable accounts for the overflow.

If you're weighing up an ISA versus an ordinary account, our ISA Calculator and the ISA allowance 2026/27 guide are good next steps.

Try it with your own numbers

Now that you understand the moving parts - Personal Allowance, starting rate, PSA and ISAs - the quickest way to see where you stand is to plug your figures into the calculator below. It works out your allowance and any tax due in seconds.

You can also use our Personal Savings Allowance Calculator on its own page, or model how a pot grows over time with the Savings Calculator.

Worked example: a basic-rate taxpayer with £1,400 interest

Let's make it concrete. Priya earns a £40,000 salary and received £1,400 in savings interest from an ordinary easy-access account during 2026/27.

1. Which band is she in? Her total income is £40,000 + £1,400 = £41,400. That's below £50,270, so she's a basic-rate taxpayer. Her PSA is therefore £1,000.
2. Does the starting rate help? No. Her non-savings income (£40,000) is well above £17,570, so the £5,000 starting-rate band is reduced to zero.
3. How much interest is taxable? £1,400 interest − £1,000 PSA = £400 of taxable interest.
4. What's the tax? It's taxed at her normal basic rate of 20%: £400 × 20% = £80.

So Priya pays £80 of tax on savings for the year. If she had instead held that money in a cash ISA, the interest would have been entirely tax-free and her bill would be £0.

A second example: a low earner with the starting rate

Now meet Tom, who is retired with a £14,000 pension and earned £4,500 of savings interest. His non-savings income is £14,000, which is £1,430 above the £12,570 Personal Allowance - so his £5,000 starting-rate band is reduced by £1,430 to £3,570. On top of that he gets his £1,000 PSA. That's £3,570 + £1,000 = £4,570 of tax-free room, comfortably more than his £4,500 interest. Tom pays no tax on his savings interest at all.

How do you actually pay any tax that's due?

Banks and building societies no longer deduct tax from your interest - they pay it gross and report the figures to HMRC automatically. If you owe tax on savings, HMRC usually collects it by adjusting your tax code (so it comes out of your wages or pension over the following year). If you complete a Self Assessment tax return, you declare the interest there instead. Either way, you don't need to do anything special unless HMRC's figures look wrong - in which case contact them.

Common mistakes to avoid

• Forgetting ISAs are separate. ISA interest doesn't use up your PSA and doesn't count towards your income band. Don't include it when checking whether you've gone over your allowance.
• Fixed-rate bonds that pay all the interest at maturity. A multi-year bond that pays out, say, three years' interest in one lump can land entirely in a single tax year - potentially blowing through your PSA or even nudging you into a higher tax band. Check when the interest is treated as "arising"; if it's accessible or credited annually, it's usually taxed year by year. If in doubt, ask the provider or HMRC.
• Assuming a 0% allowance means "not taxable". Interest within your PSA is still taxable income - it's just taxed at 0%. It still counts towards your total income for deciding your tax band, the High Income Child Benefit Charge, and so on.
• Letting interest tip you into higher rate. A large interest payment is added on top of your other income. If it pushes your total over £50,270, your PSA shrinks from £1,000 to £500 - a double sting.
• Ignoring joint accounts. Interest on a joint account is normally split 50/50 between the holders for tax, so each person uses their own allowance against their share.

Quick ways to cut your tax on savings

• Use your £20,000 ISA allowance before saving in taxable accounts.
• If you're a couple in different tax bands, hold more of the taxable savings in the name of the lower-rate (or non-taxpaying) partner.
• Spread maturities so a fixed-rate bond doesn't dump several years' interest into one tax year.
• Explore the savings & ISAs guides for more tax-efficient options.

FAQs

What is the Personal Savings Allowance 2026?

For the 2026/27 tax year the Personal Savings Allowance 2026 works the same way as before: basic-rate taxpayers can earn £1,000 of savings interest tax-free, higher-rate taxpayers £500, and additional-rate taxpayers get no allowance. It sits on top of your Personal Allowance and, for lower earners, the starting rate for savings. Use our Personal Savings Allowance Calculator to see your own allowance for the year.

How much savings interest can I earn before paying tax?

It depends on your other income. A basic-rate taxpayer can earn at least £1,000 of interest tax-free through the PSA. Someone with low non-savings income can earn far more - potentially over £6,000 - by stacking the £12,570 Personal Allowance, up to £5,000 starting rate for savings and the £1,000 PSA. ISA interest is always tax-free and sits outside these limits. Our savings interest tax calculator works out your personal threshold.

Do I have to pay tax on my savings interest in the UK?

Only if your taxable savings interest is more than the allowances available to you. Most savers pay nothing because their interest falls within the Personal Savings Allowance, the starting rate for savings, or sits inside an ISA. You only pay tax on the portion of interest above those allowances, and it's charged at your normal income tax rate. Check your position with the savings interest tax calculator.

How does savings interest and HMRC reporting work?

For savings interest, HMRC receives the figures directly from your bank or building society each year - you don't usually report ordinary account interest yourself unless you file a Self Assessment return. HMRC then collects any tax due, normally by adjusting your tax code so it comes out of wages or pension over the following year. If you think the figures are wrong, contact HMRC to correct them.

Is the Personal Savings Allowance per person or per account?

It's per person, per tax year - not per account. You get one allowance (£1,000, £500 or £0 depending on your band) that covers all your taxable savings interest combined.

Does interest inside an ISA use up my Personal Savings Allowance?

No. ISA interest is completely tax-free and sits outside the system. It doesn't reduce your PSA, doesn't count towards the starting-rate band, and doesn't affect your income tax band.

What counts as savings interest for tax?

Interest from bank and building society accounts, savings accounts, fixed-rate bonds, credit union accounts, some peer-to-peer lending, and certain government and corporate bonds. Dividends from shares are taxed separately under the dividend rules, not as savings interest.

Can I really earn over £5,000 of interest tax-free?

Yes, if your non-savings income is low. Someone with little or no other income can combine the £12,570 Personal Allowance, up to £5,000 starting rate for savings, and the £1,000 PSA - receiving a substantial amount of interest with no tax to pay.

How will HMRC know about my interest?

Banks and building societies report the interest they pay you directly to HMRC each year. HMRC then collects any tax due, usually by changing your tax code, so most people don't need to take any action.

Sources

• GOV.UK - Tax on savings interest
• GOV.UK - Individual Savings Accounts (ISAs)
• MoneyHelper - The Personal Savings Allowance

This guide is general information, not personal financial advice. For your own circumstances, speak to a qualified adviser.