Personal Savings Allowance UK 2025/26: £1,000, £500 or £0?

Quick answer

The Personal Savings Allowance (PSA) is the amount of bank and building society interest you can earn each tax year without paying income tax on it.

For 2025/26:

The PSA is separate from ISA tax-free status. Money inside an ISA pays no tax regardless of how much interest it earns. The PSA only applies to non-ISA savings interest.

Worked example — Sarah, £35,000 salary, £25,000 in non-ISA savings

Sarah earns £35,000 a year — basic-rate taxpayer.

She has £25,000 in a high-street easy-access savings account paying 4.5% AER:

• Annual interest: £25,000 × 4.5% = £1,125.
• Personal Savings Allowance: £1,000 (basic rate).
• Taxable savings income: £125.
• Tax at 20%: £25.

Modest tax bill, but real — and HMRC will collect it via her tax code adjustment without her needing to do anything formally.

Worked example — Mark, £60,000 salary, £40,000 in non-ISA savings

Mark is a higher-rate taxpayer with £40,000 in a 1-year fixed-rate Cash savings account at 4.7%.

• Annual interest: £40,000 × 4.7% = £1,880.
• PSA: £500 (higher rate).
• Taxable savings income: £1,380.
• Tax at 40%: £552.

Mark loses £552/year because his money is outside an ISA. If he moved as much as possible into a Cash ISA — £20,000 maximum per tax year — he'd start saving £376/year of that tax immediately, building over the years as more transfers in.

What counts (and doesn't)

Counts toward PSA:

• Interest from UK banks and building societies.
• Interest from credit unions (above the £100 dividend threshold).
• Government gilts (interest portion).
• Peer-to-peer lending interest.
• Corporate bonds outside ISAs.
• Interest distributions from non-ISA investment funds (bond funds, money market funds).

Doesn't count (always tax-free):

• ISA interest of any type.
• Premium Bonds prizes.
• Some specific schemes (NS&I Direct Savers within certain thresholds — though most NS&I is taxable now).

Different tax regime (not PSA):

• Dividend income has its own £500 Dividend Allowance.
• Capital gains have £3,000 annual exemption.

The starter savings rate — for low earners

This is widely missed.

If your non-savings income (wages, pension, self-employed profits) is less than £17,570 (Personal Allowance £12,570 + £5,000), you get an additional starter savings rate band of up to £5,000 tax-free on top of the PSA.

Worked example — Janet, retired, State Pension only

Janet receives a £10,500/year State Pension. She has £80,000 in non-ISA savings paying 5%.

• Annual savings interest: £4,000.
• Personal Allowance not fully used: £12,570 - £10,500 = £2,070 spare.
• This £2,070 of "spare" PA absorbs £2,070 of interest.
• Remaining £1,930 of interest at 0% (within the £5,000 starter savings rate).
• PSA: £1,000 basic rate — fully unused here, irrelevant.
• Total tax on savings interest: £0.

Janet pays no tax on £4,000 of interest. She could comfortably hold this in non-ISA accounts.

The starter savings rate disappears as your non-savings income approaches £17,570: £1 lost for every £1 of income between £12,570 and £17,570.

How HMRC collects tax on savings interest

For most PAYE workers with modest interest above the PSA:

1. Banks report your interest to HMRC annually (this is automatic since April 2016).
2. HMRC calculates whether you owe tax beyond your PSA.
3. Your tax code is adjusted for the next tax year to claw back the tax.

You don't typically have to file Self Assessment for modest savings interest. But:

• Savings interest over £10,000/year triggers a Self Assessment requirement.
• Multiple sources can also push you into Self Assessment.

What to do when you're above the PSA

Option 1: Move into Cash ISA

The £20,000 ISA allowance (2025/26) is the cleanest solution. Any new contributions move money permanently inside the tax-free wrapper.

Existing non-ISA savings can be transferred via:

• Withdrawing and depositing into a Cash ISA (within the £20k annual limit).
• Or Cash ISA transfer from another ISA you hold (no allowance used).

Multiple Cash ISAs allowed within the £20k limit from April 2024 — opens up rate-shopping mid-year.

Option 2: Premium Bonds

NS&I Premium Bonds:

• Prizes are completely tax-free, regardless of amount.
• Annual prize fund rate ~4.0% (May 2026) — competitive with Cash ISA rates.
• Maximum £50,000 per person.
• No capital risk (NS&I-backed).

For higher-rate taxpayers with >£20k of savings, Premium Bonds are often the right home for the excess.

Option 3: Stocks & Shares ISA

For longer horizons (5+ years), shifting from cash savings into equity-heavy S&S ISA gives:

• Higher long-run expected returns (~5-7% real).
• Tax-free dividends and gains forever.
• £20,000/year allowance combined with Cash ISA.

See our Cash ISA vs S&S ISA comparison for details.

Option 4: Pension contribution

For very high earners outside ISA / Premium Bond limits, pension contributions get:

• 40-45% tax relief on the way in.
• Tax-free growth.
• 25% tax-free lump sum at retirement.

For amounts above £20k ISA + £50k Premium Bonds, pension wins by miles for higher-rate earners.

Joint accounts and trusts

Joint accounts: interest is treated as 50/50 split for tax purposes by default (regardless of who contributed). You can declare different splits via HMRC form 17 if both partners are involved in ownership.

Trust accounts have their own tax regime — typically taxed at trust rates (45%) with reclaim possible through R40 if you're the beneficiary.

ISA allowance vs PSA — quick comparison

ISA wins on every metric except convenience (PSA doesn't require any action). For active savers, max ISA first, then PSA for the rest.

Try the numbers

Sources

• HMRC: Tax-free allowances on interest from savings
• HMRC: Personal Savings Allowance
• gov.uk: Tax on savings interest
• HMRC: Individual Savings Accounts (ISAs)