Tax on Savings Interest 2026/27: Personal Savings Allowance, Starting Rate and ISA Comparison

How savings interest is taxed — the basics

The UK has not withheld tax from savings interest since 6 April 2016, when the Personal Savings Allowance was introduced. Banks and building societies now pay interest gross (the full amount, before tax). HMRC collects tax through:

• Automatic PAYE code adjustment for employed and pensioned taxpayers — HMRC calculates your expected interest and adjusts your tax code to collect the tax through pay or pension.
• Self Assessment for self-assessed taxpayers, or for anyone with more than £10,000 of untaxed income from savings or investments.

If you are a PAYE employee and your savings interest is above your PSA but the excess is below £2,500, HMRC will usually collect via a code adjustment with no need to file Self Assessment. Above £2,500 excess interest, you must register for Self Assessment.

Personal Savings Allowance in 2026/27

The PSA applies only to savings interest — bank accounts, building societies, corporate bonds, government bonds (gilts), peer-to-peer interest. It does not apply to dividends (covered by the separate £500 dividend allowance) or capital gains.

The starting rate for savings

This lesser-known relief can eliminate tax on up to £5,000 of savings interest for people with low non-savings income.

How it works:

Your non-savings income (employment, pension, rental profit, self-employment profit) is allocated against your personal allowance (£12,570) first. The amount of your non-savings income above £12,570 is subtracted from the £5,000 starting rate band.

Starting rate band = £5,000 − (non-savings income − £12,570)

If non-savings income is £12,570 or below: full £5,000 starting rate applies to savings interest at 0%.

If non-savings income is £17,570 or above: starting rate band is fully used up — no benefit.

This is most valuable for retired people who have modest pension income and significant cash savings, and for people on low incomes with interest from inherited savings.

Worked example: Tom the part-time worker

Tom works part-time and earns £15,000 per year. He has £80,000 in savings accounts paying 4.5% interest = £3,600 per year in interest.

Step 1 — Non-savings income: £15,000.

Step 2 — How much personal allowance is left for savings? PA is £12,570. Non-savings income uses all of it: £15,000 > £12,570, leaving no PA for savings interest.

Step 3 — Starting rate band: £5,000 − (£15,000 − £12,570) = £5,000 − £2,430 = £2,570 remaining starting rate band at 0%.

Step 4 — PSA: Tom is a basic-rate taxpayer. PSA = £1,000.

Step 5 — Tax calculation on £3,600 interest:

Tom's savings tax: £6/year — almost entirely protected by the starting rate and PSA combined.

Worked example: Sarah the higher-rate taxpayer

Sarah earns £58,000 from employment and has £40,000 in a savings account at 4.5% = £1,800 interest.

Tax rate on savings: Sarah's salary exceeds £50,270 — all her savings interest is in the higher-rate band.

PSA: £500 (higher-rate taxpayer).

Sarah's savings tax: £520/year.

If Sarah moved her £40,000 into a Cash ISA at the same rate, her tax = £0. She would keep £520 more per year.

Worked example: Emma the additional-rate taxpayer

Emma earns £135,000 salary + £1,200 in savings interest.

Tax rate on savings: additional rate (45%). PSA = £0.

All £1,200 interest is taxable at 45%: £1,200 × 45% = £540/year in savings tax.

Any savings held in an ISA would eliminate this entirely.

When does an ISA beat a standard savings account?

The comparison depends on your tax rate and the interest rate.

At 4.5% interest:

Interpretation: A basic-rate taxpayer with less than £22,222 in savings pays no tax on interest (PSA covers it all at 4.5%). Above £22,222, they start paying 20% on interest — and an ISA would save that tax.

For a higher-rate taxpayer, the break-even is only £11,111. Anyone with more than this in savings should prioritise moving money into a Cash ISA to shelter interest.

Annual tax saving from using a Cash ISA (at 4.5% rate)

Over 20 years, compounded, these annual savings become substantial — and the ISA also shelters all future growth tax-free.

Flexible ISAs — a key feature to check

Most Cash ISAs are now flexible ISAs: you can withdraw money and re-deposit it within the same tax year without losing your annual allowance. This means a Cash ISA can function like a regular easy-access savings account, with the added benefit of tax-free interest.

Not all ISAs are flexible — Stocks and Shares ISAs are generally not flexible. Check with your provider before assuming you can withdraw and replace freely.

Example: Jane puts £20,000 into a flexible Cash ISA in April 2026. In August 2026 she withdraws £5,000 for a car repair. She can deposit £5,000 back into the same ISA before 5 April 2027 without using additional allowance. Without the flexible feature, re-depositing the £5,000 would use £5,000 of a new year's allowance.

Reporting savings interest to HMRC

If you are not in Self Assessment and your savings interest exceeds your PSA:

• For small amounts: HMRC typically adjusts your PAYE tax code automatically based on bank data they receive. You may see a change to your tax code (e.g., 1257L becomes 1207L) which collects the extra tax through payroll.
• If you receive a tax code adjustment that seems wrong, check the breakdown in your personal tax account at gov.uk.
• For larger amounts (untaxed interest more than £2,500 above PSA): you must register for Self Assessment.
• Self Assessment taxpayers: declare all savings interest on the return, even amounts below the PSA (HMRC uses this to cross-reference).

HMRC receives interest data directly from banks and building societies, so unreported interest above the PSA will typically be detected.

Practical savings tax optimisation checklist

• Confirm your taxpayer type (basic/higher/additional) and your PSA for 2026/27.
• Add up all savings interest expected this year across all accounts.
• If interest > PSA: open or maximise a Cash ISA to shelter the excess.
• If non-savings income is below £17,570: check if the starting rate for savings applies.
• If you have a spouse or partner with a lower income: consider whether some savings could be in their name to use their PSA and potentially their lower tax rate.
• Check whether your Cash ISA is flexible (can withdraw and replace within the tax year).
• Review your tax code if you receive PAYE income — ensure HMRC's estimate of your interest income is accurate.

Sources

• HMRC: Tax on savings interest
• HMRC: Personal Savings Allowance
• HMRC: Starting rate for savings
• gov.uk: Individual Savings Accounts (ISAs)